en Ayelen Banegas, Lucas Devigne, Mulalo Mamburu, Kleopatra Nikolaou, Anna Samarina, Fabio Tamburrini

This paper synthesizes the literature on vulnerabilities in government bond-backed repo markets, focusing on the features that contribute to both the fragility and stability of these markets. The literature shows that the same features that enable efficient liquidity provision, including short-term funding, dealer intermediation, extensive collateral reuse, and low haircuts, can also create channels for rapid transmission of stress. The review documents tight linkages between repo and government bond markets, highlighting how repos are key to the build-up of leverage and can propagate stress across funding, cash, and derivatives markets, particularly through dealers and nonbank financial intermediaries such as investment firms, hedge funds, and money market funds. Evidence from recent stress episodes illustrates how these vulnerabilities materialize in practice. The review also examines post-crisis regulatory reforms and central bank interventions, identifying how these measures have enhanced market resilience while also creating trade-offs for market dynamics, with implications for liquidity and collateral availability.]]> FEDS Paper David Glancy, Robert Kurtzman, Lara Loewenstein

Place-based policies are often caught between two potentially conflicting aims: (i) directing aid to needy communities and (ii) spurring investment. We study this tradeoff in the context of the Opportunity Zones (OZ) program. Leveraging unique phase-level microdata on commercial construction projects, we show that US state governors prioritized designating tracts where construction projects were already being planned. About two-thirds of the greater construction growth in OZs can be attributed to this selection. States prioritizing tracts with greater investment opportunities observed larger construction increases in designated tracts. We calibrate a structural model to quantify the effects of the program and examine counterfactuals under alternative preferences or eligibility criteria.]]> FEDS Paper Christopher Gust, Edward Herbst, and David López-Salido

We develop a finite-horizon planning model in which firms choose how far ahead to plan when setting prices. Planning further ahead improves a firm's pricing decision but requires cognitive effort. We derive analytical solutions for a firm's chosen planning horizon and show that large and persistent aggregate demand or supply disturbances induce firms to plan further ahead, making inflation more sensitive to shocks and generating endogenous movements in inflation uncertainty. Quantitatively, we show that the model matches the positive relationship between the size of inflation forecast revisions and inflation uncertainty observed in the data.]]> FEDS Paper Manuel Gonzalez-Astudillo, Jean-Philippe Laforte, Antoine Lepetit

Potential output and the natural rate of unemployment are commonly estimated through trend-cycle decompositions, where they are identified as underlying trends reflecting slow-moving supply factors. In this paper, we extend this framework to accommodate the possibility that cyclical disturbances affect trends endogenously through "scarring" effects. Two major changes occur relative to standard specifications. First, a significant share of business-cycle fluctuations is absorbed by endogenous movements in the trends rather than shifts in the cycle. Second, the estimated cycle--relieved of explaining the persistence in real variables--tracks inflation developments more closely, including through a steeper Phillips curve. While this steeper slope implies a strong co-movement between inflation and real activity in response to cyclical shocks, such strong co-movement is rarely apparent in the data. Consequently, the estimation shows a shift toward more sizable changes in the purely supply-driven components of the trends, mirrored by smaller innovations in the cycle process. In turn, this rebalancing entails different historical paths for the activity gaps, carrying important implications for the conduct of monetary policy.]]> FEDS Paper Robert Minton and Hugo Monnery

Using survey data from U.S. firms, we study the primitive beliefs for pricesetting: firms’ forecasts of their own marginal costs. These forecasts are disconnected from CPI expectations, (over)react to current and past costs systematically, and underreact to aggregate shocks until costs move. We show that under empirically realistic cost beliefs the New Keynesian Phillips curve is steeper and less forward-looking. Supply shocks are more inflationary because they hit costs quickly. Demand shocks are less inflationary because firms fail to anticipate future wage pressure. Forward guidance weakens at long horizons but strengthens in the near term.]]> FEDS Paper David E. Rappoport

The Credit Surface along the leverage dimension gives the bond spread as a function of the loan-to-value ratio. Empirically, we show that uncertainty shocks typically increase spreads and steepen the credit surface, profoundly affecting the supply of credit. Theoretically, we derive necessary and sufficient conditions for the convexity of the credit surface, and for changes in the anticipated distribution of collateral prices that lead to steepening of the credit surface. Finally, we show that the credit surface itself fully reveals the entire distribution of collateral prices, thus providing a new and vivid language with which to describe uncertainty and stochastic orders. Credit surface steepening itself is a new stochastic order that may better capture our intuitive notion of more uncertainty.]]> FEDS Paper R. Matthew Darst, Lucia Gurrieri, Arazi Lubis, and Alexandros P. Vardoulakis

This paper examines whether regulatory liquidity buffers enable banks to support corporate borrowers during financial stress. Using confidential bank-firm credit data and handcollected Liquidity Coverage Ratio regulation (LCR) disclosures during COVID-19, we find that banks with higher LCR buffers above the regulatory minimum provided significantly more credit to firms with large undrawn credit lines in March 2020. Critically, only buffers, not overall LCR levels, matter, revealing that the regulatory minimum operates as a binding constraint during stress. The effect is concentrated among high-quality borrowers with clean credit profiles and disappears by mid-2020, confirming that LCR buffers provide selective, temporary liquidity insurance during acute stress.]]> FEDS Paper Diego Vilán

This study examines how fluctuations in firm-level uncertainty arise over the business cycle and how they influence aggregate economic activity. To do so, it develops a general equilibrium incomplete-markets model in which heterogeneous, risk-averse firms face idiosyncratic demand uncertainty and aggregate shocks to consumer credit conditions. A change in aggregate credit affects not only the expected level of firm demand, but also the cross-sectional dispersion of sales per worker by shifting the probability that firms operate at capacity. Thus, first-moment shocks give rise to endogenous second-moment effects. The model is disciplined using U.S. Compustat data on firm sales and employment and proprietary customer traffic data. The calibrated economy reproduces key cross-sectional moments and business-cycle comovements, including countercyclical dispersion in firm outcomes. Quantitatively, endogenous uncertainty accounts for roughly one quarter of the output response and one third of the employment response to aggregate credit shocks. The results suggest that uncertainty is not only an independent source of aggregate fluctuations, but also an endogenous propagation mechanism through which changes in demand conditions amplify business cycles.]]> FEDS Paper Hyung Joo Kim and Dong Hwan Oh

Despite documented heterogeneity in volatility dynamics across the option surface, standard implied volatility forecasting models apply homogeneous parameters throughout. We introduce a machine-learning framework that uses regression trees to partition the surface along both moneyness and maturity dimensions, identifying data-driven regions where distinct forecasting models perform best. Extending the Surface Heterogeneous Autoregressive (SHAR) framework of Dufays, Jacobs, and Rombouts (2025), we develop tree-based SHAR specifications that preserve interpretable structure while allowing model parameters to vary across the surface. Empirical analysis using S&P 500 options demonstrates that the boosted tree-based specification achieves the lowest out-of-sample forecast errors across all horizons, reducing one-month-ahead RMSE by 13 percent versus the benchmark SHAR model. The improvements are statistically significant and particularly pronounced during stress periods. The estimated tree presents economically interpretable segmentation: short-dated options exhibit higher daily persistence but lower monthly persistence than long-dated options, while deep out-of-the-money calls or puts display distinct dynamics from near-the-money contracts.]]> FEDS Paper John C. Driscoll, Benjamin S. Kay, Geng Li, and Cindy M. Vojtech

We provide the first lender-level analysis linking two independently constructed credit supply measures: the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) and credit card mail offers from Mintel Comperemedia. Using a matched panel of 73 banks from 2000 to 2019, we find that quarterly mail volume growth was 18 percent lower when banks reported tightening credit card lending standards, a relationship robust to including credit demand indicators. In addition, SLOOS responses on credit limits and interest rate spreads are also correlated with these terms observed in mail offers. Our findings validate both measures as informative credit supply indicators.]]> FEDS Paper Luca Guerrieri, Jinill Kim, and Arsenii Mishin

Within narrowly defined industries, the most productive firms produce far more than the least productive from the same inputs, and this dispersion widens in downturns. We build a tractable representative-agent model in which financial frictions—adverse selection and moral hazard—make firms sort endogenously into lenders, strategic defaulters, and producers. As credit conditions vary, the resulting misallocation gives aggregate total factor productivity (TFP) an endogenous component that accounts for about 30 percent of the variance of TFP at business-cycle frequencies, a third of it from strategic default. We show that our tractable model can match key features of the observed distribution of productivity across firms and its co-movement with output growth and credit conditions in the data.]]> FEDS Paper Bence Bardóczy, Akshay Shanker, and Mateo Velásquez-Giraldo

The sequence-space Jacobian (SSJ) method of Auclert et al. (2021a) has made heterogeneous-agent models far easier to solve, fueling an explosion of applications. But even SSJ strains against capacity constraints when state spaces grow very large, as in economies with overlapping generations of heterogeneous agents (HA-OLG). We show how to exploit the special properties of age—finite planning horizons and deterministic transitions between ages—to compute the Jacobians of a general class of HA-OLG models orders of magnitude faster. We provide rigorous proofs, age-specific Jacobians that decompose aggregate dynamics across cohorts, an application to the dynamic general-equilibrium effects of secularly declining birth rates, and an accessible cookbook for adopting our method.]]> FEDS Paper John Coglianese and Jade A. Fang

Researchers are faced with the choice of which of the many recently developed difference-in-differences methods to use in practice. To assess these estimators' relative performance for single-unit event studies, we conduct 134,000+ state-level placebo event studies across 13 estimators. We find that no single method dominates. Performance is context-dependent, with synthetic-control-like methods sometimes outperforming and sometimes underperforming two-way-fixed-effect-like and matching methods. Performance also varies across states at least as much as it does across estimators. Our results highlight the need for practitioners to conduct placebo tests to understand the performance of methods in their research context.]]> FEDS Paper Anthony M. Diercks, Petra Sinagl, and Andrea Tamoni

We study how macroeconomic developments affect asset prices by analyzing the response of equity yields to a well-identified long-run growth shock. Using synthetic equity yield data from Giglio et al. (2024), we show that a positive long-run shock steepens the equity yield curve by increasing expected dividend growth while leaving discount rates largely unchanged. We examine how the investment driving this growth is financed and how yields respond across value and growth firms. Growth-firm yields respond more strongly than value-firm yields, reflecting larger changes in expected dividend growth. Ai et al. (2018)'s model, modified to separate cash dividends from total payout, best matches these responses relative to benchmark equity term structure models.]]> FEDS Paper Douglas Webber, and Mike Zabek

Using novel data from the Survey of Household Economics and Decisionmaking, we examine how labor market tightness affects workers’ job quality. We estimate that a 10 percent increase in job vacancies not only increases the probability of changing jobs, it yields an 11–18 percent increase in the (unconditional) probability of switching to a better job overall, and one with greater pay and benefits, interest in the work, and advancement opportunities. Because tight labor markets improve both worker pay and job amenities in roughly the same proportion, their benefits to workers are underestimated when based on pay alone.]]> FEDS Paper