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F e d e r a l R e s e r v e B a n k o f N e w Yo r k

Number 1

2009

ResearchUpdate
Research and Statistics Group

www.newyorkfed.org/research

New Lending Facility Aims to Promote Liquidity in the Funding Markets
he private funding markets, where
(Current Issues in Economics and Finance,
dealers typically finance their secuvol. 15, no. 2, February 2009).
rities positions, were severely
The authors explain that the TSLF
impaired in early 2008. Lenders of funds,
increases the ability of primary dealers to
worried about the value of collateral as
finance their positions in the private
well as counterparty credit risk, became
markets. The facility allows dealers to bid
increasingly concerned about losses on
a fee to borrow up to $200 billion in
repurchase agreements. They responded
Treasury securities for a term of twentyby reducing the amount they were willing
eight days by pledging as collateral other
to lend for a given amount of collateral,
securities, including agency debt securihalting lending against certain types
ties and mortgage-backed securities. They
of collateral altogether, and demanding
can then use the borrowed Treasuries,
greater compensation for accepting
which are relatively easy to finance, as
riskier collateral.
collateral to obtain cash in the private
To address unprecedented liquidity
markets. As a result, dealers have less
challenges amid funding market stress, in
need to sell assets into illiquid markets,
March 2008 the Federal Reserve estaband lenders are less likely to experience
lished a new auction facility. Through the
a loss of confidence.
Term Securities Lending Facility (TSLF),
Fleming, Hrung, and Keane offer a
the Fed sought to promote liquidity in
detailed look at the TSLF. They discuss
the funding markets as well
as improve the operation
Also in this issue…
of the broader financial
Most downloaded publications. . . . . . . . . . . . . . . . . . . . . . 2
markets, note Michael J.
Staff Reports: New titles . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Fleming, Warren B. Hrung,
Forthcoming in the Economic Policy Review . . . . . . . . . . 6
and Frank M. Keane, in
Papers presented at conferences . . . . . . . . . . . . . . . . . . . . 6
“The Term Securities
Papers recently published by Research
Lending Facility: Origin,
Group economists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Design, and Effects”
Other new publications . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Publications and papers: January-March. . . . . . . . . . . . . . 9

T

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2

the market conditions leading up to the
launch of the facility, the features that
distinguish it from other Fed liquidity
facilities, and the structure and operation
of the program. They also review the first
ten auctions, conducted in spring 2008,
for early evidence of the facility’s use and
effectiveness.
The study concludes that the TSLF
contributes to improved liquidity conditions in collateralized funding markets by
more effectively balancing supply and
demand in the markets for Treasury and
non-Treasury collateral. Just prior to the

first auction, in late March 2008, the
financing spread between overnight
agency mortgage-backed-security repos
and Treasury repos was 100 basis points.
By April and May, it ranged between
0 and 20 basis points. Spreads in the less
liquid term market exhibited similar patterns. These lower financing spreads, the
authors suggest, provide evidence that
the facility has been effective in improving market liquidity.
The article is available at www.newyorkfed
.org/research/current_issues/ci15-2.html.

Most Downloaded Publications
isted below are the most sought after
Research Group articles and papers
from the New York Fed’s website
and from the Bank’s page on the
Social Science Research Network site
(www.ssrn.com/link/FRB-New-York.html).
New York Fed website, first-quarter 2009:

L
■

“Understanding the Securitization of
Subprime Mortgage Credit,” by Adam
B. Ashcraft and Til Schuermann (Staff
Reports, no. 318, March 2008) –
3,732 downloads

■

“The Yield Curve as a Predictor of U.S.
Recessions,” by Arturo Estrella and
Frederic S. Mishkin (Current Issues in
Economics and Finance, vol. 2, no. 7,
June 1996) – 3,040 downloads

■

“Are Home Prices the Next ‘Bubble’?”
by Jonathan McCarthy and Richard Peach
(Economic Policy Review, vol. 10, no. 3,
December 2004) – 2,040 downloads

SSRN website, through first-quarter 2009:
■

“Understanding the Securitization of
Subprime Mortgage Credit,” by Adam
B. Ashcraft and Til Schuermann (Staff
Reports, no. 318, March 2008) –
5,536 downloads

■

“The Consolidation of the Financial
Services Industry: Causes, Consequences,
and Implications for the Future,” by
Allen N. Berger, Rebecca S. Demsetz,
and Philip E. Strahan (Staff Reports,
no. 55, December 1998) – 2,254 downloads

■

“An Empirical Analysis of Stock and
Bond Market Liquidity,” by Tarun
Chordia, Asani Sarkar, and Avanidhar
Subrahmanyam (Staff Reports, no. 164,
March 2003) – 1,832 downloads

For the full lists of top-ten downloads,
visit www.newyorkfed.org/research/
top_downloaded/index.html.

F Feeddeer raal l RRees seer rvvee BBaannkk oof f NNeeww YYoor rkk

www.newyorkfed.org/research

New Titles in the Staff Reports Series
The following new staff reports are available
at www.newyorkfed.org/research/
staff_reports.

MACROECONOMICS
AND GROWTH
No. 367, March 2009
CONDI: A Cost-of-NominalDistortions Index
Stefano Eusepi, Bart Hobijn,
and Andrea Tambalotti
The authors construct a price index with
weights for the prices of different PCE
(personal consumption expenditures) goods
chosen to minimize the welfare costs of
nominal distortions. In this cost-of-nominaldistortions index (CONDI), the weights are
computed in a multi-sector New Keynesian
model with time-dependent price setting.
The model is calibrated using U.S. data on
the dispersion of price stickiness and labor
shares across sectors. The study finds that
the CONDI weights depend mostly on

price stickiness and are less affected by the
dispersion in labor shares. Moreover,
CONDI stabilization closely approximates
the optimal monetary policy and leads to
negligible welfare losses. Finally, CONDI is
better approximated by targeting core inflation rather than headline inflation—and is
even better approximated with an adjusted
core index that covers total expenditures
excluding autos, clothing, energy, and food
at home, but including food away from home.

INTERNATIONAL
3
No. 361, January 2009
Global Liquidity and Exchange Rates
Tobias Adrian, Erkko Etula,
and Hyun Song Shin
This study presents evidence that fluctuations in the aggregate balance sheets of
financial intermediaries forecast exchange
rate returns—at weekly, monthly, and quarterly frequencies, both in and out of sample,
and for a large set of countries. The

Publications and Papers
The Research and Statistics Group produces a wide range of publications:
■

The Economic Policy Review—a policy-oriented journal focusing on economic
and financial market issues.

■

EPR Executive Summaries—online versions of selected Economic Policy Review
articles, in abridged form.

■

Current Issues in Economics and Finance—concise studies of topical economic
and financial issues.

■

Second District Highlights—a regional supplement to Current Issues.

■

Staff Reports—technical papers intended for publication in leading economic
and finance journals, available only online.

■

Publications and Other Research—an annual catalogue of our research output.

Research and Statistics Group

Research Update

■

Number 1, 2009

authors estimate prices of risk using a
cross-sectional, arbitrage-free asset pricing
approach and show that balance sheets
forecast exchange rates because of the latter’s association with fluctuations in risk
premia. They provide a rationale for an
intertemporal equilibrium pricing theory in
which intermediaries are subject to balance
sheet constraints.

MICROECONOMICS
No. 364, February 2009
College Major Choice and the Gender Gap
Basit Zafar

4

Males and females are markedly different
in their choice of college major. Two main
reasons have been suggested for the gender
gap: differences in innate abilities and differences in preferences. This study addresses
the question of how college majors are chosen, focusing on the underlying gender gap.
The author uses a unique data set of students’ subjective expectations about
choice-specific outcomes to estimate a
model in which a college major is selected
under uncertainty. Enjoying coursework,
finding fulfillment in potential jobs, and
gaining parental approval are the most
important determinants. Males and females
differ primarily in their preferences in the
workplace. The gender gap is due mainly to
differences in beliefs about enjoying
coursework and differences in preferences,
rather than to females being underconfident about their academic ability or fearing
monetary discrimination.
No. 365, February 2009
An Experimental Investigation
of Why Individuals Conform
Basit Zafar
This paper presents a simple model constructed on the premise that people, when
making choices, are motivated by their own
payoff as well as by how their actions com-

F e d e r a l R e s e r v e B a n k o f N e w Yo r k

pare with those of others in their reference
group. Zafar shows that conformity of
actions may arise either from learning
about the norm (learning), or from adhering to the norm because of image-related
concerns (influence). To disentangle the
two empirically, he uses the fact that
image-related concerns can be present only
if actions are publicly observable. The
model predictions are tested in a “charitable contribution” experiment in which
the subjects’ actions and identities are
unmasked in a controlled and systematic
way. Both social learning and social influence play an important role in the subjects’
choices. Moreover, social ties (defined as
subjects knowing one another from outside
the experimental environment) affect the
role of social influence.
No. 366, March 2009
Credit Market Competition
and the Nature of Firms
Nicola Cetorelli
This paper explores the hypothesis that the
availability of credit at the time of a firm’s
founding has a profound effect on that
firm’s nature. Cetorelli conjectures that
when financial capital is difficult to obtain,
firms will need to be built as relatively
solid organizations. However, when capital
is easily available, firms can be constituted
with an intrinsically weaker structure.
Cetorelli studies the life cycles of businesses
in existence over thirty years through a
period of regulatory reform during which
U.S. states removed barriers to entry in the
banking industry, a development that
resulted in significantly improved credit
competition. The evidence confirms his
conjecture. Firms constituted in postreform years are intrinsically frailer than
those founded in a more financially constrained environment, while firms of prereform vintage do not seem to adapt their
nature to an easier credit environment.

www.newyorkfed.org/research

BANKING AND FINANCE
No. 360, January 2009
Money, Liquidity, and Monetary Policy
Tobias Adrian and Hyun Song Shin
In a market-based financial system, banking and capital market developments are
inseparable, and funding conditions are
closely tied to fluctuations in the leverage
of market-based financial intermediaries.
Offering a window on liquidity, the balance
sheet growth of broker-dealers provides a
sense of the availability of credit. Contractions of broker-dealer balance sheets have
tended to precede declines in real economic
growth, even before the current turmoil.
For this reason, balance sheet quantities of
market-based financial intermediaries are
important macroeconomic state variables
for the conduct of monetary policy.
No. 362, February 2009
The Term Structure of Inflation Expectations
Tobias Adrian and Hao Wu
Adrian and Wu present estimates of the
term structure of inflation expectations,
derived from an affine model of real and
nominal yield curves. The model features
stochastic covariation of inflation with the
real pricing kernel, enabling the authors to
extract a time-varying inflation risk premium.
Adrian and Wu fit the model not only to
yields, but also to the yields’ variancecovariance matrix, thus increasing identification power. They find that model-implied
inflation expectations can differ substantially

from break-even inflation rates when market volatility is high. The model’s ability to
be updated weekly makes it suitable for
real-time monetary policy analysis.

QUANTITATIVE METHODS
No. 363, February 2009
Model Selection Criteria for
Factor-Augmented Regressions
Jan J. J. Groen and George Kapetanios
This paper develops several theoretical
conditions that selection criteria must fulfill to provide a consistent estimate of the
factor dimension relevant for a factoraugmented regression. The authors’ framework takes into account factor estimation
error and does not depend on a specific
factor estimation methodology. It also provides, as a by-product, a template for
developing selection criteria for regressions
that include standard generated regressors.
The conditions make it clear that standard
model selection criteria do not provide a
consistent estimate of the factor dimension
in a factor-augmented regression. The
authors propose alternative criteria that do
fulfill their conditions. These criteria essentially modify standard information criteria
so that the corresponding penalty function
for dimensionality also penalizes factor
estimation error. The authors show through
Monte Carlo and empirical applications
that these modified information criteria are
useful in determining the appropriate dimensions of factor-augmented regressions. ■

Research and Statistics Group

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Research Update

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Number 1, 2009

Forthcoming in the Economic Policy Review
The Case for TIPS: An Examination
of the Costs and Benefits
William C. Dudley, Jennifer Roush,
and Michelle Steinberg Ezer

6

Slightly more than a decade has passed
since the introduction of the Treasury
Inflation-Protected Securities (TIPS)
program, through which the Treasury
Department issues inflation-indexed debt.
Several studies have suggested that the
program has been a financial disappointment for the Treasury and by extension
U.S. taxpayers. Relying on ex post analysis,
the studies argue that a more cost-effective
strategy remains the issuance of nominal
Treasury securities. This article proposes
that evaluations of the TIPS program be
more comprehensive, and instead focus on

the ex ante costs of TIPS issuance compared with nominal Treasury issuance. The
authors contend that ex ante analysis is a
more effective way to assess the costs of
TIPS over the long run. Furthermore, relative cost calculations—whether ex post or
ex ante—are just one aspect of a comprehensive analysis of the costs and benefits of
the TIPS program. TIPS issuance provides
other benefits that should be taken into
account when evaluating the program,
especially when TIPS are only marginally
more expensive or about as expensive to
issue as nominal Treasury securities.
The article is available at www.newyorkfed
.org/research/epr/forthcoming/
0903dudl.html.

Papers Presented by Economists in the Research and Statistics Group
“Aggregation and the PPP Puzzle in a
Sticky-Price Model,” Carlos Carvalho.
Annual Meeting of the American Economic
Association, San Francisco, California,
January 4. With Fernanda Nechio.
“Estimating the Cross-Sectional
Distribution of Price Stickiness from
Aggregate Data,” Carlos Carvalho. Rutgers
University Department of Economics seminar, February 17. With Niels Dam.
“Heterogeneous Price Setting Behavior
and Aggregate Dynamics: Some General
Results,” Carlos Carvalho. Annual Meeting
of the American Economic Association,
San Francisco, California, January 3.
With Felipe Schwartzman.
“Credit Market Competition and the
Nature of Firms,” Nicola Cetorelli.
World Bank Research Group seminar,
Washington, D.C., January 27.

F e d e r a l R e s e r v e B a n k o f N e w Yo r k

“Can State Merit Aid Programs Have
Unintended Consequences? A Closer
Look,” Rajashri Chakrabarti. Annual
Meeting of the American Economic
Association, San Francisco, California,
January 4. With Joydeep Roy. Also presented at the Annual Conference of the
American Education Finance Association,
Nashville, Tennessee, March 19.
“Credit Frictions and Optimal Monetary
Policy,” Vasco Cúrdia. Annual Meeting of
the American Economic Association,
San Francisco, California, January 3.
With Michael Woodford.
“Dynamic Factor Models with TimeVarying Parameters: Measuring Changes in
International Business Cycles,” Marco Del
Negro. University of Southern California
seminar, Los Angeles, California, March 5.
With Christopher Otrok. Also presented at
a University of Wisconsin–Madison seminar,
Madison, Wisconsin, March 10.

www.newyorkfed.org/research

“The Advantage of Flexible Targeting
Rules,” Andrea Ferrero. IMT Institute
for Advanced Studies Lucca, Department
of Economics seminar, Lucca, Italy,
January 19.
“Repo Market Effects of the Term
Securities Lending Facility,” Michael
Fleming. Allied Social Science Associations
annual meeting, San Francisco, California,
January 4. With Warren Hrung and Frank
Keane. Also presented at a Brandeis
University seminar, Waltham, Massachusetts,
March 19.
“Banking Globalization and Monetary
Transmission,” Linda Goldberg. Seminar
cosponsored by the Centre for Economic
Policy Research and the European
University Institute, Florence, Italy, March 6.
With Nicola Cetorelli.
“Higher Order Beliefs and the
Comovement of Asset Prices,” Christian
Grisse. Annual Meeting of the American
Finance Association, San Francisco,
California, January 4.
“Federal Reserve Responses to Crises,”
Asani Sarkar. TradeTech USA Equity
Trading Summit 2009, New York City,
March 4.

“The Effect of the Term Auction Facility
on the London Inter-Bank Offered Rate,”
Asani Sarkar and Zhenyu Wang. Annual
Meeting of the American Economic
Association, San Francisco, California,
January 4. With James McAndrews.
“CONDI: A Cost-of-Nominal-Distortions
Index,” Andrea Tambalotti. Graduate
Institute of International and Development
Studies seminar, Geneva, Switzerland,
March 17. With Stefano Eusepi and Bart
Hobijn. Also presented at a Università
Statale seminar, Milan, Italy, March 25.
“Investment Shocks and Business Cycles,”
Andrea Tambalotti. Annual Meeting of the
American Economic Association, San
Francisco, California, January 5. With
Alejandro Justiniano and Giorgio Primiceri.
“What Determines Family Structure?”
Wilbert van der Klaauw. City University
of New York Graduate Center seminar,
New York City, March 17. With David Blau.
“Incentives and the Rating of MortgageBacked Securities,” James Vickery. DePaul
University Department of Finance seminar,
Chicago, Illinois, January 27. With Adam
Ashcraft and Paul Goldsmith-Pinkham. ■

Research and Statistics Group

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Research Update

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Number 1, 2009

Recently Published
Andrea Ferrero. 2009. “Fiscal and
Monetary Rules for a Currency Union.”
Journal of International Economics 77, no. 1
(February): 1-10.

Asani Sarkar. 2009. “Market Sidedness:
Insights into Motives for Trade Initiation,”
with Robert A. Schwartz. Journal of
Finance 64, no. 1 (February): 375-423.

Jan Groen. 2009. “A Real-Time Evaluation
of Bank of England Forecasts of Inflation
and Growth.” International Journal of
Forecasting 25, no. 1 (January-March): 74-80.

Wilbert van der Klaauw. 2009. “The Effects
of In-Work Benefit Reform in Britain on
Couples: Theory and Evidence,” with
Marco Francesconi and Helmut Rainer.
Economic Journal 119, no. 535 (February):
66-100.

Antoine Martin. 2009. “Banks, Markets,
and Efficiency,” with Falko Fecht. Annals
of Finance 5, no. 2 (March): 131-60.

8

Ay egul ahin. 2009. “Why Did the Average
Duration of Unemployment Become So
Much Longer?” with Toshihiko Mukoyama.
Journal of Monetary Economics 56, no. 2
(March): 200-9.

Zhenyu Wang. 2009. “Y2K Options and the
Liquidity Premium in Treasury Markets,” with
Suresh Sundaresan. Review of Financial
Studies 22, no. 3 (March): 1021-56. ■

Other New Publications
■

Publications and Other Research. The 2008 edition of our catalogue lists all of
the papers published in our research series as well as many papers published by
our economists in economic and finance journals, conference volumes, and
scholarly books.
www.newyorkfed.org/research/publication_annuals/por2008.pdf

■

Facts & Trends (vol. 2, no. 1, April 2009): “A Look at Upstate New York’s Subprime
Mortgages in Foreclosure” reveals that the region has fewer owner-occupied subprime
mortgages per 1,000 housing units than New York State as a whole or the United
States. In addition, subprime loans are performing better than those in the state
and the country. (Facts & Trends is published by the New York Fed’s Community
Affairs Office.)
www.newyorkfed.org/regional/2009_Facts_Trends_Vol_2_1.pdf

F e d e r a l R e s e r v e B a n k o f N e w Yo r k

www.newyorkfed.org/research

Research and Statistics Group
Publications and Papers:
January-March 2009
Publications are available at www.newyorkfed
.org/research/publication_annuals/
index.html.

ECONOMIC POLICY REVIEW
Forthcoming
The Case for TIPS: An Examination
of the Costs and Benefits
William C. Dudley, Jennifer Roush,
and Michelle Steinberg Ezer

CURRENT ISSUES IN
ECONOMICS AND FINANCE,
VOL. 15
No. 1, January 2009
What’s Behind Volatile Import Prices
from China?
Mary Amiti and Donald R. Davis
No. 2, February 2009
The Term Securities Lending Facility:
Origin, Design, and Effects
Michael J. Fleming, Warren B. Hrung,
and Frank M. Keane

STAFF REPORTS
No. 360, January 2009
Money, Liquidity, and Monetary Policy
Tobias Adrian and Hyun Song Shin
No. 361, January 2009
Global Liquidity and Exchange Rates
Tobias Adrian, Erkko Etula,
and Hyun Song Shin
No. 362, February 2009
The Term Structure of Inflation
Expectations
Tobias Adrian and Hao Wu
No. 363, February 2009
Model Selection Criteria for FactorAugmented Regressions
Jan J. J. Groen and George Kapetanios
No. 364, February 2009
College Major Choice and the Gender Gap
Basit Zafar
No. 365, February 2009
An Experimental Investigation
of Why Individuals Conform
Basit Zafar
No. 366, March 2009
Credit Market Competition
and the Nature of Firms
Nicola Cetorelli
No. 367, March 2009
CONDI: A Cost-of-NominalDistortions Index
Stefano Eusepi, Bart Hobijn,
and Andrea Tambalotti

The views expressed in the publications and papers summarized in Research Update are those of the authors and
do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.

Research and Statistics Group

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