Avoiding Sovereign Default Contagion: A Normative Analysis

Sergio de Ferra and Enrico Mallucci

Sovereign debt crises happen in waves, spreading from one country to the other. The euro-area debt crisis of 2011-12 is a good example of that. Stress in the sovereign debt market quickly spread from Greece and Ireland to Portugal, Spain, and Italy.

DOI: https://doi.org/10.17016/2380-7172.2600

Central Banks' Financial Stability Communications during the COVID-19 Pandemic

The COVID-19 pandemic has led to the implementation of unprecedented policy actions by central banks around the world. Along with the reduction of interest rates and the use of asset purchase and lending programs, central bank communications have been actively deployed as a policy tool.

DOI: https://doi.org/10.17016/2380-7172.2741

SRISKv2 - A Note

Marco Migueis and Alexander Jiron

SRISK is a very influential metric of the systemic risk posed by financial firms. However, SRISK suffers from a conceptual flaw in its capital shortfall calculation. This note proposes a modified version of this metric, SRISKv2, which corrects this flaw and provides a more sensible metric of the systemic risk posed by financial firms.

DOI: https://doi.org/10.17016/2380-7172.2724

Underlying Inflation: Its Measurement and Significance

Underlying inflation is the rate of inflation that would be expected to eventually prevail in the absence of economic slack, supply shocks, idiosyncratic relative price changes, or other disturbances. Underlying inflation is a useful benchmark for monetary policy in that it provides an idea of the rate of price change that would be expected to obtain under "normal" circumstances in an economy where the level of resource utilization is putting neither upward nor downward pressure on inflation.

DOI: https://doi.org/10.17016/2380-7172.2624

Index of Common Inflation Expectations

Data that are potentially informative about the inflation expectations of economic agents have grown over recent years and now include information from a wide variety of surveys as well as from financial instruments. These data differ along several key dimensions, including the type of economic agent, the horizon of the expectation, the source of data (survey versus market-based measures), and the associated inflation concept, which can make the co-movement of various expectations measures difficult to discern.

DOI: https://doi.org/10.17016/2380-7172.2551

Conflicting Signals: Implications of Divergence in Surveys and Market-Based Measures of Policy Expectations

By Anthony Diercks and Isfar Munir

Divergent signals can arise between survey-based and market-derived measures of policy expectations. In such situations, there is an open question of how one might interpret these divergent signals.

DOI: https://doi.org/10.17016/2380-7172.2568

Implementing Monetary Policy in an “Ample-Reserves” Regime: Maintaining an Ample Quantity of Reserves (Note 2 of 3)

 In this second note, we describe some important influences on the supply of and demand for reserves and how the Fed will need to account for these influences in maintaining an ample quantity of reserves over the long run. These considerations are most relevant in normal times, not in periods in which there are severe strains in financial markets or weakness in economic activity that necessitate aggressive policy actions by the Fed that substantially increase reserves.

DOI: https://doi.org/10.17016/2380-7172.2553

The Federal Reserve’s Review of Its Monetary Policy Framework: A Roadmap

David Altig, Jeff Fuhrer, Marc P. Giannoni, and Thomas Laubach

In early 2019, the Federal Open Market Committee (FOMC or the Committee) launched a comprehensive review of its monetary policy framework (MPF)—the strategies, tools, and communication practices employed by the Federal Reserve to achieve its congressionally mandated goals of maximum employment and price stability.

DOI: https://doi.org/10.17016/2380-7172.2767

Fixed Income Market Structure: Treasuries vs. Agency MBS

James Collin Harkrader and Michael Puglia

This FEDS Note analyzes the structure of the agency mortgage-backed securities (MBS) market through the lens of the TRACE Treasury data initiative, which is a significant component of a broader inter-agency effort to enhance understanding and transparency of the Treasury securities market. As in several previous FEDS Notes describing the Treasury cash market structure, this note uses transactions reported to the Financial Industry Regulatory Authority (FINRA)'s Trade Reporting and Compliance Engine (TRACE) to examine aggregate trading volumes in the agency MBS market across venues, security types and participants. We show how agency MBS provide a useful counterfactual to cash Treasuries when analyzing the evolution of Treasury cash market structure and its implications for liquidity. We provide evidence that the participation of Principal Trading Firms (PTFs) in Treasury markets has caused the overall volume of intermediation to rise there, particularly in the interdealer broker (IDB) venue. We also find that, relative to Treasury markets, intermediation in the agency MBS market is concentrated among fewer firms, and in particular the primary dealers, suggesting that PTF participation in Treasury markets has diversified intermediation in the IDB venue across a larger number of firms.

DOI: https://doi.org/10.17016/2380-7172.2622

Worker Churn at Establishments over the Business Cycle

Alison Weingarden

This note decomposes worker churn (which occurs when business establishments have simultaneous hiring and separations) into two components using monthly Job Opening and Labor Turnover Survey responses from the U.S. Bureau of Labor Statistics. On average, nearly a third of worker churn was "employer-initiated" through layoffs and two thirds was "quit initiated" over the 2001 to 2016 period.

DOI: https://doi.org/10.17016/2380-7172.2379

Comparing Means of Payment: What Role for a Central Bank Digital Currency?

Paul Wong and Jesse Leigh Maniff

This paper looks at the potential benefit that a central bank digital currency (CBDC) could provide in the context of existing payment mechanisms. Central banks today provide the primary payment mechanisms for trade and commerce: cash, used by the public, and electronic payment services, used by eligible financial institutions.

DOI: https://doi.org/10.17016/2380-7172.2739

Observations from the FooWire Project: Experimenting with DLT for Payments Use

Jillian Buttecali, Zachary Proom, Paul Wong

In 2019, a team at the Federal Reserve Board (Board) conducted small-scale experimentation, named the "FooWire project," to build a payment system using distributed ledger technology (DLT). The team built the system using Hyperledger Fabric, a popular DLT platform, because it generally met the team's design requirements of a closed network, mature technology, and enterprise readiness.

DOI: https://doi.org/10.17016/2380-7172.2737

The Cost Structure of Consumer Finance Companies and Its Implications for Interest Rates: Evidence from the Federal Reserve Board's 2015 Survey of Finance Companies

Lisa Chen and Gregory Elliehausen

Interest includes compensation not only for forbearance (forgoing current income for future income) and risk bearing but also compensation for expenses incurred to originate, service, and collect loans. The latter expenses are largely fixed, not varying much with the amount of credit.

DOI: https://doi.org/10.17016/2380-7172.2610

Are There Competitive Concerns in “Middle Market” Lending?

This note analyzes competition and concentration in "middle market" lending using loan level data obtained from large bank holding companies' Y14 reports to the Federal Reserve. The middle market segment is typically considered to be credit for firms larger than small businesses but too small for large-scale commercial lending or syndicated credit. Lender choice and the supply of credit to large and small firms has been studied extensively by academics and policy makers.

DOI: https://doi.org/10.17016/2380-7172.2618

An Early Evaluation of the Effects of the Pandemic on Living Arrangements and Household Formation

As with many other aspects of life—including the record-setting decline in employment—the COVID-19 pandemic has profoundly affected the living arrangements of millions of Americans. In this note, we document a fact that has as yet received little attention:

DOI: https://doi.org/10.17016/2380-7172.2735

Principal Trading Firm Activity in Treasury Cash Markets

James Collin Harkrader, Michael Puglia

This FEDS Note aims to share insights on Treasury cash transactions reported in the Financial Industry Regulatory Authority (FINRA)'s Trade Reporting and Compliance Engine (TRACE). Following earlier joint FEDS Notes and Liberty Street Economics blog posts that examined aggregate trading volume in the Treasury cash market across venues and security types, this post sheds light on the trading activity of Principal Trade Firms (PTFs) and other market participants that are not registered broker-dealer members of FINRA.

DOI: https://doi.org/10.17016/2380-7172.2620

New Financial Market Measures of the Neutral Real Rate and Inflation Expectations

Alex Aronovich and Andrew Meldrum

Long-term U.S. interest rates have fallen substantially over the last two decades. The 5-to-10-year nominal forward interest rate implied by the prices of U.S. Treasury securities is now about 7 percentage points lower than it was at the start of the 1990s.

DOI: https://doi.org/10.17016/2380-7172.2621

Monitoring Risk From Collateral Runs

We present an estimate of the total amount of funds primary dealers can access from the intermediation of cash and securities through secured funding transactions (SFTs). We highlight how this activity can introduce an additional source of risk: the abrupt withdrawal of cash borrowers, which we call collateral runs.

DOI: https://doi.org/10.17016/2380-7172.2605

How Did Banks Fund C&I Drawdowns at the Onset of the COVID-19 Crisis?

Banks experienced significant balance sheet expansions in March 2020 due to unprecedented increases in commercial and industrial (C&I) loans and deposit funding. According to the Federal Reserve's H.8 data, "Assets and Liabilities of Commercial Banks in the U.S.", C&I loans increased by nearly $480 billion in March—the largest monthly increase in the history of this series, surpassing the nearly $90 billion increase in C&I loans in the six weeks following Lehman Brothers' collapse in 2008.

DOI: https://doi.org/10.17016/2380-7172.2601

Dealer Inventory Constraints during the COVID-19 Pandemic: Evidence from the Treasury Market and Broader Implications

Strains in the Treasury market in March indicated a decline in broker-dealer inventory capacity, which has historically predicted persistent reductions in market liquidity across asset classes, the availability of financing for non-financial firms, and real activity.

DOI: https://doi.org/10.17016/2380-7172.2581

The Increasing Deflationary Impact of Consumer Digital Access Services

David M. Byrne and Carol A. Corrado

Although U.S. consumer price statistics are prone to upward bias, they remain useful if imperfect accounting has a known and stable effect (Boskin et al., 1998; Moulton, 2018). For example, monetary authorities may set a target for measured inflation higher than their objective for true inflation if official measures are routinely overstated (Bernanke and Mishkin, 1997).

DOI: https://doi.org/10.17016/2380-7172.2619

A New Indicator of Common Wage Inflation

Hie Joo Ahn, Han Chen, and Michael Kister

The cyclical state of the economy and the natural rate of unemployment are key unobserved variables in policymakers' analysis of economic developments. The price Phillips curve relates the measures of resource utilization—often through deviations of the unemployment rate from the natural rate of unemployment—to consumer price inflation.

DOI: https://doi.org/10.17016/2380-7172.2550

Modeling the Global Effects of the COVID-19 Sudden Stop in Capital Flows

Ozge Akinci, Gianluca Benigno, and Albert Queralto

The COVID-19 outbreak has triggered unusually fast outflows of dollar funding from emerging market economies (EMEs). These outflows are known as sudden stop episodes, and are typically followed by economic contractions.

DOI: https://doi.org/10.17016/2380-7172.2586

Implementing Monetary Policy in an "Ample-Reserves" Regime: The Basics (Note 1 of 3)

The FOMC has stated that it intends to continue implementing monetary policy in a regime with an ample supply of reserves. This Note, the first in a three-part series, provides an introductory discussion of what it means to implement policy in such a regime and how the Fed ensures interest rate control in an environment with an ample supply of reserves in the banking system.

DOI: https://doi.org/10.17016/2380-7172.2552

How Correlated is LIBOR with Bank Funding Costs?

In a recent article in the BIS Quarterly Review, authors Schrimpf and Sushko (2019) provide an overview of the LIBOR transition to risk-free rates led by the FSB Official Sector Steering Group (OSSG). They also argue that rates like LIBOR may be desirable because banks “require a lending benchmark that behaves not too differently from the rates at which they raise funding.”

DOI: https://doi.org/10.17016/2380-7172.2539

Who Owns U.S. CLO Securities? An Update by Tranche

Against the backdrop of the COVID-19 crisis, leveraged loans have deteriorated and concerns about CLOs, the main buyers of loans on the secondary market, have increased. These concerns have reduced the demand for new CLOs, making it harder for firms to borrow through leveraged loans on the primary market, as banks have found it more difficult to sell loans on the secondary market.

DOI: https://doi.org/10.17016/2380-7172.2592

Measuring the Natural Rate of Interest: The Role of Inflation Expectations

David Lopez-Salido, Gerardo Sanz-Maldonado, Carly Schippits, and Min Wei

The "natural" or equilibrium real rate of interest is an important concept in macroeconomics. On the one hand, the natural (real) rate provides a description of the real interest rate path consistent with the eventual full capacity of utilization of available resources in the context of low and stable inflation.

DOI: https://doi.org/10.17016/2380-7172.2593

How do Rural and Urban Retail Banking Customers Differ?

David Benson, Serafin Grundl and Richard Windle

This note documents differences and similarities between rural and urban retail banking clients using data from the Board's Survey of Consumer Finances (SCF). Understanding geographic differences in local demand conditions for banking is important for designing effective public policy.

DOI: https://doi.org/10.17016/2380-7172.2513

Assessing the Resiliency of Non-DFAST Banks to a Financial Shock

Kevin F. Kiernan and Cindy M. Vojtech

Every year the Federal Reserve Board conducts stress tests on large bank holding companies (BHCs) to ensure that those institutions will remain healthy enough to lend to households and businesses even in a significant downturn. This note analyzes the resiliency of the banking industry by also stressing banks that are not subject to that annual Dodd-Frank Act stress test (DFAST).

DOI: https://doi.org/10.17016/2380-7172.2514

Monitoring the Liquidity Profile of Mutual Funds

Sirio Aramonte, Chiara Scotti, and Ilknur Zer

Policymakers and academics have been particularly attuned to the issues of liquidity transformation and first mover advantage at open-end mutual funds.Open-end mutual funds engage in liquidity transformation because they promise one-day redemptions on their assets, even when the invested assets have low or uncertain liquidity.

DOI: https://doi.org/10.17016/2380-7172.2558

The Geography of Small Business Dynamics

Business dynamism is a micro-foundation for economic growth. Productivity gains come from a reallocation of resources from less efficient to more efficient firms, often through entry of new firms and exit of existing firms.

DOI: https://doi.org/10.17016/2380-7172.2580

A Comparison of Living Standards Across the States of America

Elena Falcettoni and Vegard Nygaard (University of Houston)

While a large body of literature has examined how welfare, or living standards, vary across countries, very little is known about how welfare varies within a given country. This note summarizes and discusses the analysis and results in Falcettoni and Nygaard (2020), where we seek to fill this gap in the context of the United States.

DOI: https://doi.org/10.17016/2380-7172.2545

How do children spend their time? Time use and skill development in the PSID

Hannah Hall and Eric Nielsen

As income and wealth inequality have grown in the United States in recent decades, the large and growing differences in household expenditures on children from advantaged versus disadvantaged backgrounds have increasingly become a matter of public concern. High socioeconomic status (SES) households (those with high incomes and/or high levels of parental education) increasingly spend more money on physical goods (books, tuition, computers, etc.) and more time on "enrichment" activities such as homework, tutoring, reading, and extracurricular activities that are thought to directly foster cognitive (academic) skills.

DOI: https://doi.org/10.17016/2380-7172.2577

Analyzing the Community Bank Leverage Ratio

Bert Loudis, Daniel Nguyen, and Carlo Wix

This note analyzes the newly introduced Community Bank Leverage Ratio ("CBLR") framework. The analysis covers the framework's eligibility, its capital stringency, and its potential impact on system-wide capital levels under a hypothetical adverse scenario.

DOI: https://doi.org/10.17016/2380-7172.2516

Real Effects of Uncertainty: Evidence from Brexit

In the historic Brexit referendum on June 23, 2016, U.K. citizens voted in favor of leaving the European Union (EU), a result that created substantial uncertainty regarding the future economic relationship between the United Kingdom and the EU. As can be seen in Figure 1, uncertainty, measured by the Economic and Policy Uncertainty (EPU) index of Baker et al. (2016), spiked around the Brexit referendum date and has remained elevated relative to its pre-referendum levels since then.

DOI: https://doi.org/10.17016/2380-7172.2536

An Aggregate View of Bank Lending Standards and Demand

The Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) provides information about the supply of, and demand for, bank credit in the United States on a quarterly basis. SLOOS responses are used internally by Federal Reserve staff in monitoring bank lending conditions and as an input into research and analysis about broader economic and financial conditions.

DOI: https://doi.org/10.17016/2380-7172.2546

How Much Does Home Equity Extraction Matter for Spending?

Aditya Aladangady and Kelsey O'Flaherty

In this note, we investigate recent trends in home equity extraction and how these trends may have impacted household spending and residential improvements. Home equity extractions—which rose and fell with house prices in the 1990s and 2000s—have remained sluggish in the recovery despite low interest rates and gains in home equity. Compared to the mid-2000s, equity extractions have fallen especially among younger households and those with lower credit scores and higher leverage, suggesting that mortgage credit supply is likely tighter than before the recession, at least for portions of the population.

DOI: https://doi.org/10.17016/2380-7172.2535

Regulatory Arbitrage in the Use of Insurance in the New Standardized Approach for Operational Risk Capital

Basel's new standardized approach (SA) for operational risk capital may allow for regulatory arbitrage through the use of insurance. Under the SA, banks will have incentive to insure recurring losses, which can meaningfully reduce capital requirements even as it does not meaningfully decrease tail operational loss exposure. Several alternatives to deal with this regulatory arbitrage strategy are discussed.

DOI: https://doi.org/10.17016/2380-7172.2479

The Great Recession and a Missing Generation of Exporters

William F. Lincoln, Andrew H. McCallum, and Michael Siemer

While the large collapse in aggregate international trade volumes during the Great Recession has been widely studied in the literature, the recovery is much less well understood. Indeed, by 2014 U.S. foreign sales were still below their historical post-recession level. In this note, we summarize the results of Lincoln, McCallum, and Siemer (2019), which considers how much of a role a "missing generation of exporters" played in explaining the relatively slow growth of foreign sales after the financial crisis.

DOI: https://doi.org/10.17016/2380-7172.2531

Common and idiosyncratic inflation

In this note, we disentangle changes in prices due to economy-wide (common) shocks from changes in prices due to idiosyncratic shocks.

DOI: https://doi.org/10.17016/2380-7172.2508

What Happened in Money Markets in September 2019?

In mid-September 2019, overnight money market rates spiked and exhibited significant volatility, amid a large drop in reserves due to the corporate tax date and increases in net Treasury issuance.

DOI: https://doi.org/10.17016/2380-7172.2527

The Liquidity Coverage Ratio and Corporate Liquidity Management

This note examines the changes in the liquidity management at banks and nonbank financial firms in the United States that occurred following the proposal of the liquidity coverage ratio (LCR) requirement in 2010 and its finalization in 2014.

DOI: https://doi.org/10.17016/2380-7172.2509

Wealth concentration levels and growth: 1989-2016

Wealth concentration in the U.S. has increased over the past 25 years across multiple methodologies for measuring wealth. But the reasons for the increase—and the timing of the increase—are quite different. In this note, we show that most available estimates are fairly consistent in level and trend prior to the Financial Crisis. However, the timing and reasons for the sharp increase in wealth concentration during and after the crisis differ remarkably across methods. We describe some of the factors that underlie this divergence.

DOI: https://doi.org/10.17016/2380-7172.2438

What Happened to U.S. Business Dynamism?

Ufuk Akcigit and Sina T. Ates

The U.S. economy has witnessed a number of striking trends that indicate a rising market concentration and a slowdown in business dynamism in recent decades. We attempt to understand potential common forces behind these empirical regularities through the lens of a micro-founded general equilibrium model of endogenous firm dynamics.

DOI: https://doi.org/10.17016/2380-7172.2497

What Happened to Foreign Direct Investment in the United States?

This note demonstrates that the slowdown in FDIUS can be explained by two special factors: 1) a handful of corporate restructurings that are purely tax- and regulation-driven and affect the equity portion of direct investment flows, and 2) a reversal in intercompany debt flows that are often the result of corporate tax planning.

DOI: https://doi.org/10.17016/2380-7172.2499

How Global Value Chains Change the Trade-Currency Relationship

François de Soyres, Erik Frohm, Vanessa Gunnella

This note summarizes the main results of the de Soyres et al. (2018) paper, drawing out the most policy-relevant implications.

DOI: https://doi.org/10.17016/2380-7172.2504

How Do U.S. Global Systemically Important Banks Lower Their Capital Surcharges?

Jared Berry, Akber Khan, and Marcelo Rezende

In this note, we examine whether and how U.S. G-SIBs adjust their systemic importance indicators to lower their surcharges.

DOI: https://doi.org/10.17016/2380-7172.2480

Goods-Market Frictions and International Trade

Pawel M. Krolikowski and Andrew H. McCallum

The difficulty of locating and building connections with overseas buyers is a prevalent firm-level barrier to exporting. Producers and retailers must spend time and resources to find one another before they can transact.

DOI: https://doi.org/10.17016/2380-7172.2501

Why Has Wage Growth Been Subdued in the Advanced Foreign Economies?

Stephen Lin, Kaede Johnson, and Tyler Powell1

This note argues that certain factors, especially slower productivity growth and lower natural rates of unemployment, can explain much of the weakness of wage growth and the apparent breakdown of the simple wage Phillips curve.

DOI: https://doi.org/10.17016/2380-7172.2410

Monetary Policy Space in a Recession: Some Simple Interest Rate Arithmetic

As an alternative, two recession scenarios are presented in which interest rates change from October 2019 levels by the same amount as seen, on average, around the 1990 and 2001 recessions.

DOI: https://doi.org/10.17016/2380-7172.2484

Raising the Inflation Target: Lessons from Japan

In January 2013, the Bank of Japan increased its inflation target from 1 percent to 2 percent in an effort to end chronic deflation that had lasted for more than a decade. In this note, the author reviews this Japanese experience and highlights possible lessons for other central banks that may be interested in examining the possibility of raising their inflation target at some point in the future.

DOI: https://doi.org/10.17016/2380-7172.2493

Disclaimer: FEDS Notes are articles in which Board staff offer their own views and present analysis on a range of topics in economics and finance. These articles are shorter and less technically oriented than FEDS Working Papers and IFDP papers.

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Last Update: September 21, 2020