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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

2010

ResearchUpdate
Research and Statistics Group

www.newyorkfed.org/research

James J. McAndrews and Simon M. Potter Are Named
Co-Directors of Research

T

Monetary Economics, the Journal of
h e Research and Statistics Group
Banking and Finance, and the Journal of
is pleased to announce that the
Money, Credit, and Banking. Jamie holds
Bank’s Board of Directors has
a B.A. and Ph.D. in economics from the
appointed James J. McAndrews and
University of Iowa.
Simon M. Potter co-directors of research
Simon, director of economic research,
and executive vice presidents. Previously,
has been with the New York Fed since
Jamie and Simon were associate directors
1998. Previously, Simon taught at UCLA,
of research.
Johns Hopkins, NYU, and Princeton. He
Jamie, director of financial research,
is the recipient of National Science
joined the Bank in 1997. Previously, he
Foundation awards and has served on
was a senior economist and research
the editorial boards of several academic
advisor at the Federal Reserve Bank of
journals.
Philadelphia. He has served as a consultSimon has written extensively on noning economist to the Bank of England,
linear dynamics over the business cycle,
the Reserve Bank of Australia, the
and his current research concentrates on
Swedish Riksbank, the Bank of Japan,
forecasting the probability of recessions.
and the World Bank. Jamie is also a
fellow of the Wharton
Also in this issue…
Financial Institutions
Center.
Study Describes Use of DSGE Models in Policy Analysis
Jamie’s research
by Examining 2004 Pickup in U.S. Inflation . . . . . . . . . 2
focuses on the economics
Upstate New York’s Housing Markets Have Sidestepped
of money and payments,
the U.S. Boom-Bust Cycle. . . . . . . . . . . . . . . . . . . . . . . . 3
monetary policy impleMost downloaded publications. . . . . . . . . . . . . . . . . . . . . . 4
mentation, and market
Staff Reports: New titles . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
liquidity. Recent work
Papers recently published
by Research Group economists. . . . . . . . . . . . . . . . . . . 11
has appeared in the
Papers presented at conferences . . . . . . . . . . . . . . . . . . . 12
Review of Economics and
Publications and papers: January-March . . . . . . . . . . . . 14
Statistics, the Journal of

RV oe ls ue ma rec h9 , U Np du amtbee r■ 4N, u 2m0b0e 6r 1 , 2 0 1 0

Recently, he has published in the Review
of Economic Studies, the Journal of
Empirical Finance, and the International
Economic Review.

Simon holds a B.A. in philosophy,
politics, and economics and an M.Phil. in
economics from Oxford University, and a
Ph.D. in economics from the University
of Wisconsin at Madison. ■

Study Describes Use of DSGE Models in Policy Analysis
by Examining 2004 Pickup in U.S. Inflation

2

I

n recent years, there has been a significant evolution in the formulation
and communication of monetary
policy by central banks. Many banks
now present their economic outlook and
policy strategies to the public in a more
formal way, a process that uses modern
analytical tools and advanced econometric methods in forecasting and policy
simulations. The development of
dynamic stochastic general equilibrium,
or DSGE, models has played a major
role in this process. These models,
which emphasize the dependence of
current choices on expected future outcomes, are familiar to policymakers and
academics—but they are not well known
to the public.
A study forthcoming in the Economic
Policy Review seeks to broaden the
public’s understanding of these important analytical tools (“Policy Analysis
Using DSGE Models: An Introduction” ) .
Authors Argia M. Sbordone, Andrea
Tambalotti, Krishna Rao, and Kieran
Walsh introduce the basic structure,
logic, and application of DSGE models
and offer a simple illustration of how
an estimated model in this class can be
used to answer specific monetary policy
questions.

Using a simplified, small-scale DSGE
specification, designed to account for
three key macroeconomic variables—
GDP growth, core inflation, and the
federal funds rate—the authors analyze
the pickup in inflation in the United
States in the first half of 2004. Inflation
levels, which were close to 1 percent
at the beginning of 2003, climbed to
values steadily above 2 percent through
the end of 2008.
The exercise suggests that a significant
portion of the inflation acceleration was
attributable to a change in inflation
expectations, which the model links to an
increase in the private sector’s perception
of the Federal Reserve’s implicit inflation
target. The main lesson to be learned
from the exercise, observe the authors, is
that “the most effective approach to controlling inflation is through the management of expectations, rather than
through actual movements of the policy
instrument.” The lesson is consistent
with the large amount of private sector
attention and speculation that usually
surrounds central bankers’ pronouncements on their likely future actions.
The article is available at
www.newyorkfed.org/research/epr/
forthcoming/1003sbor.html.

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

www.newyorkfed.org/research

Upstate New York’s Housing Markets Have Sidestepped
the U.S. Boom-Bust Cycle

T

he United States has experienced a
significant boom and bust in real
estate activity in the past decade.
A new study, however, concludes that
upstate New York has been largely
insulated from the home-price volatility
experienced in other parts of the country
during the recession.
In “Bypassing the Bust: The Stability
of Upstate New York’s Housing Markets
during the Recession” (Current Issues in
Economics and Finance, vol. 16, no. 3),
authors Jaison R. Abel and Richard
Deitz assess the performance of upstate
New York’s housing markets during the
most recent residential real estate cycle
and compare the pattern of real estate
activity for the region with patterns for
other U.S. metropolitan areas. They also
examine the prevalence of nonprime
mortgage lending—the riskiest segment
of the residential mortgage market—and
compare the regional penetration and
performance of these loans with national
penetration and performance.
The study focuses on nine major metro
areas upstate: Albany, Binghamton,
Buffalo, Elmira, Glens Falls, Ithaca,
Rochester, Syracuse, and Utica.
The authors find that upstate’s housing markets have been fairly stable
during the recession, with many metro
areas outperforming the nation. During
the U.S. housing boom of 2000-06,
home prices in Binghamton, Buffalo,
Elmira, Rochester, Syracuse, and Utica

did not appreciate as rapidly as the
national average, although prices in
Albany, Glens Falls, and Ithaca outpaced
it. Since then, home prices in every
upstate metro area have risen faster, or
fallen more slowly, than the national
average. Notably, Buffalo, Rochester, and
Syracuse all ranked in the top 10 percent
of metro areas in terms of home price
appreciation in 2009, with Buffalo ranking sixth overall.
Abel and Deitz also find that the penetration of nonprime loans in upstate
New York was far less significant than in
other parts of the country, particularly
when compared with metropolitan areas
that experienced a housing bust. In
addition, these loans have performed
better upstate than they have nationally.
Generally, metro areas with a higher
penetration of nonprime loans by 2006—
when activity peaked—experienced faster
house price increases, but also suffered
the most significant declines once the
reversal began. As a result, a larger
number of the nonprime loans that
originated in these areas have entered
delinquency or foreclosure. The authors
observe that upstate’s relatively low
incidence of nonprime mortgages and
the better-than-average performance
of these loans contributed to the area’s
stability.
The article is available at
www.newyorkfed.org/research/
current_issues/ci16-3.html.

Research and Statistics Group

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Research Update

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Number 1, 2010

Most Downloaded Publications

L

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).

■

4
■

■

SSRN website, first-quarter 2010:
■

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

New York Fed website, first-quarter 2010:

■

“Understanding the Securitization
of Subprime Mortgage Credit,” by
Adam B. Ashcraft and Til Schuermann
(Staff Reports, no. 318, March 2008) –
3,414 downloads

“What Can We Learn from Privately
Held Firms about Executive
Compensation?” by Rebel A. Cole and
Hamid Mehran (Staff Reports, no. 314,
January 2008) – 367 downloads

■

“Broker-Dealer Risk Appetite and
Commodity Returns,” by Erkko Etula
(Staff Reports, no. 406, November 2008) –
225 downloads

“Is the International Role of the Dollar
Changing?” by Linda S. Goldberg
(Current Issues in Economics and
Finance, vol. 16, no. 1, January 2010) –
3,345 downloads
“Policy Perspectives on OTC
Derivatives Market Infrastructure,”
by Darrell Duffie, Ada Li, and
Theo Lubke (Staff Reports, no. 424,
January 2010 ) – 3,264 downloads

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

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.

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

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. 421, January 2010
Monetary Cycles, Financial Cycles,
and the Business Cycle
Tobias Adrian, Arturo Estrella,
and Hyun Song Shin
One of the most robust stylized facts in
macroeconomics is the forecasting power of
the term spread for future real activity. The
economic rationale for this forecasting
power usually appeals to expectations of
future interest rates, which affect the slope
of the term structure. This paper proposes
a possible causal mechanism for the forecasting power of the term spread, deriving
from the balance sheet management of
financial intermediaries. When monetary
tightening is associated with a flattening
of the term spread, it reduces net interest
margin, which in turn makes lending less
profitable, leading to a contraction in the
supply of credit. The authors provide
empirical support for this hypothesis,
thereby linking monetary cycles, financial
cycles, and the business cycle.
No. 422, January 2010
Financial Intermediation, Asset Prices,
and Macroeconomic Dynamics
Tobias Adrian, Emanuel Moench,
and Hyun Song Shin
Fluctuations in the aggregate balance
sheets of financial intermediaries provide a
window on the joint determination of asset
prices and macroeconomic aggregates. The
authors document that financial intermediary balance sheets contain strong predictive
power for future excess returns on a broad
set of equity, corporate, and Treasury bond
portfolios. They also show that the same
intermediary variables that predict excess
returns forecast real economic activity and
various measures of inflation. The study’s

findings point to the importance of financing frictions in macroeconomic dynamics
and provide quantitative guidance for
preemptive macroprudential and monetary
policies.
No. 425, January 2010
The Measurement of Rent Inflation
Jonathan McCarthy and Richard W. Peach
Shelter has a large weight in the CPI and
in the personal consumption expenditures
deflator, resulting in substantial scrutiny of
how tenant rent and owners’ equivalent
rent are measured in these price indexes.
This study describes how the Bureau of
Labor Statistics (BLS) estimates tenant rent
and owners’ equivalent rent. McCarthy and
Peach then estimate alternative inflation
rates for tenant rent and owners’ equivalent
rent based on American Housing Survey
data, following BLS methodology as closely
as possible. Their alternative tenant rent
inflation series is generally consistent with
the corresponding BLS series. However,
their alternative owners’ equivalent rent
inflation series is consistently lower than
the corresponding BLS series by an
amount large enough to have a significant
effect on the overall inflation rate. This
result is driven by the inverse relationship
between rent inflation and the level of
monthly housing cost evident in the
American Housing Survey data.
No. 428, January 2010
Macro Risk Premium and Intermediary
Balance Sheet Quantities
Tobias Adrian, Emanuel Moench,
and Hyun Song Shin
The macro risk premium measures the
threshold return for real activity that
receives funding from savers. This paper
bases its argument on the relationship
between the macro risk premium and the
growth of financial intermediaries’ balance

Research and Statistics Group

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Number 1, 2010

sheets. The spare capacity of their balance
sheets determines the intermediaries’ risk
appetite, which in turn determines the real
projects that receive funding and, hence,
the supply of credit. Monetary policy
affects risk appetite by changing the ability
of intermediaries to leverage their capital.
The authors estimate the time-varying risk
appetite of financial intermediaries for the
United States, Germany, the United
Kingdom, and Japan, and study the joint
dynamics of risk appetite using macroeconomic aggregates for the United States.
They argue that risk appetite is an important indicator of monetary conditions.
No. 433, February 2010
The Paradox of Toil
Gauti Eggertsson
This paper proposes a new paradox: the
paradox of toil. Suppose everyone wakes
up one day and decides they want to work
more. What happens to aggregate employment? Eggertsson shows that, under certain
conditions, aggregate employment falls;
that is, there is less work in the aggregate
because everyone wants to work more. The
conditions for the paradox to apply are that
the short-term nominal interest rate is zero
and there are deflationary pressures and
output contraction, much as during the
Great Depression in the United States and,
perhaps, the 2008 financial crisis in large
parts of the world. The paradox of toil is
tightly connected to the Keynesian idea of
the paradox of thrift. Both are examples of
a fallacy of composition.
No. 434, February 2010
Correlated Disturbances
and U.S. Business Cycles
Vasco Cúrdia and Ricardo Reis
The dynamic stochastic general equilibrium
(DSGE) models used to study business
cycles typically assume that exogenous
disturbances are independent first-order

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

autoregressions. This paper relaxes this
tight and arbitrary restriction by allowing
for disturbances that have a rich contemporaneous and dynamic correlation
structure. The authors’ first contribution is
a new Bayesian econometric method that
uses conjugate conditionals to allow for
feasible and quick estimation of DSGE
models with correlated disturbances. Their
second contribution is a reexamination of
U.S. business cycles. They find that allowing for correlated disturbances resolves
some conflicts between estimates from
DSGE models and those from vector
autoregressions and that a key missing
ingredient in the models is countercyclical
fiscal policy. According to the authors’
estimates, government spending and technology disturbances play a larger role in
the business cycle than previously
ascribed, while changes in markups are
less important.
No. 435, February 2010
Labor-Dependent Capital Income
Taxation That Encourages Work
and Saving
Sagiri Kitao
Kitao proposes a simple mechanism of
capital taxation that is negatively correlated
with labor supply. Using a life-cycle model
of heterogeneous agents, she shows that
this tax scheme provides a strong work
incentive when households possess large
assets and high productivity later in the life
cycle, when they would otherwise work
less. This reformed system also adds to the
saving motive and raises aggregate capital.
Moreover, the increased economic activities
expand the tax base, and the revenueneutral reform results in a lower average
tax rate. The paper finds that this tax
scheme improves long-run welfare and that
the majority of current generations would
experience a welfare gain from a transition
to the reformed system.

www.newyorkfed.org/research

No. 436, March 2010
Social Security, Benefit Claiming, and
Labor Force Participation: A Quantitative
General Equilibrium
Approach
.
Selahattin Imrohoro g lu and Sagiri Kitao
.
Imrohoro g lu and Kitao use a general equilibrium model of overlapping generations
that incorporates endogenous saving,
labor force participation, work hours, and
Social Security benefit claims to study the
impact of three Social Security reforms:
1) a reduction in benefits and payroll
taxes; 2) an increase in the earliest retirement age, to sixty-four from sixty-two; and
3) an increase in the normal retirement
age, to sixty-eight from sixty-six. They find
that a 50 percent cut in the scope of the
current system significantly raises asset
holdings and the labor input, primarily
through higher participation of older
workers, and reduces the shortfall of the
Social Security budget through a reduction in early claiming. Increasing the
normal retirement age also raises saving
and the labor supply, but the effects are
smaller. Postponing the earliest retirement
age has only a negligible effect.
No. 440, March 2010
Productivity and the Density
of Human Capital
Jaison R. Abel, Ishita Dey,
and Todd M. Gabe
The authors estimate a model of urban
productivity in which the agglomeration
effect of density is enhanced by a metropolitan area’s stock of human capital.
Estimation accounts for potential biases
due to the endogeneity of density and
industrial composition effects. Using new
information on output per worker for U.S.
metropolitan areas along with a measure
of density that accounts for the spatial distribution of population, they find that a
doubling of density increases productivity

by 2 to 4 percent. Consistent with theories
of learning and knowledge spillovers in
cities, the authors demonstrate that the
elasticity of average labor productivity with
respect to density increases with human
capital. Metropolitan areas with a human
capital stock one standard deviation below
the mean realize no productivity gain,
while doubling density in metropolitan
areas with a human capital stock one
standard deviation above the mean yields
productivity benefits that are about twice
the average.

INTERNATIONAL
No. 430, February 2010
Loss Aversion, Asymmetric Market
Comovements, and the Home Bias
Kevin Amonlirdviman and Carlos Carvalho
The different utility impact of wealth gains
and losses leads loss-averse investors to
behave similarly to investors with high
risk aversion. So shouldn’t these agents
perceive larger gains from international
diversification than standard expectedutility preference agents with plausible
levels of risk aversion? They might not,
because comovements in international
stock markets are asymmetric:
Correlations are higher in market downturns than in upturns. This asymmetry
dampens the gains from diversification
relatively more for loss-averse investors.
Amonlirdviman and Carvalho analyze the
portfolio problem of such an investor who
has to choose between home and foreign
equities in the presence of asymmetric
comovement in returns. Perhaps surprisingly, in the context of the home bias
puzzle they find that the loss-averse
investors behave similarly to those with
standard expected-utility preferences and
plausible levels of risk aversion.

Research and Statistics Group

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Number 1, 2010

MICROECONOMICS
No. 432, February 2010
Subprime Mortgage Lending in New York
City: Prevalence and Performance
Ebiere Okah and James Orr

8

Subprime mortgage lending expanded in
New York City between 2004 and mid2007, and delinquencies on these subprime
loans have been rising sharply. This study
uses a rich, loan-level data set of the city’s
outstanding subprime loans as of January
2009 to describe the main features of this
lending and to model the performance of
these loans. These subprime loans represent a smaller share of total housing units
in the city than is true nationwide. In addition, they are found to be clustered in
neighborhoods where average borrower
credit quality is low and, unlike prime
mortgage loans, where African-Americans
and Hispanics constitute relatively large
shares of the population. The authors estimate a model of the likelihood that these
loans will become seriously delinquent and
find a significant role for credit quality of
borrowers, debt-to-income and loan-tovalue ratios at the time of loan origination,
and estimates of the loss of home equity.

BANKING AND FINANCE
No. 423, January 2010
The Federal Reserve’s Commercial Paper
Funding Facility
Tobias Adrian, Karin Kimbrough,
and Dina Marchioni
The Federal Reserve created the Commercial
Paper Funding Facility (CPFF) in the midst
of severe disruptions in money markets
following the bankruptcy of Lehman Brothers
on September 15, 2008. The CPFF finances
the purchase of highly rated unsecured
and asset-backed commercial paper from
eligible issuers via primary dealers. The
facility is a liquidity backstop to U.S. issuers
of commercial paper, and its creation was

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

part of a range of policy actions undertaken
by the Federal Reserve to provide liquidity
to the financial system. This paper documents aspects of the financial crisis relevant to the creation of the CPFF, reviews
the operation of the CPFF, discusses use
of the facility, and draws conclusions for
lender-of-last-resort facilities in a marketbased financial system.
No. 424, January 2010
Policy Perspectives on OTC Derivatives
Market Infrastructure
Darrell Duffie, Ada Li, and Theo Lubke
In the wake of the recent financial crisis,
over-the-counter (OTC) derivatives have
been blamed for increasing systemic risk.
Although OTC derivatives were not a
central cause of the crisis, the complexity
and limited transparency of the market
reinforced the potential for excessive
risk taking, as regulators did not have a
clear view of how OTC derivatives were
being used. This paper discusses how the
New York Fed and other regulators could
improve weaknesses in the OTC derivatives market through stronger oversight
and better regulatory incentives for
infrastructure improvements to reduce
counterparty credit risk and bolster market
liquidity, efficiency, and transparency. Used
responsibly with these reforms, over-thecounter derivatives can provide important
risk management and liquidity benefits to
the financial system.
No. 426, January 2010
Repo Market Effects of the Term
Securities Lending Facility
Michael J. Fleming, Warren B. Hrung,
and Frank M. Keane
The Term Securities Lending Facility
(TSLF) was introduced by the Federal
Reserve to promote liquidity in the
financing markets for Treasury and other
collateral. The authors evaluate one aspect
of the program—the extent to which it has
narrowed repo spreads between Treasury

www.newyorkfed.org/research

collateral and less liquid collateral. They
find that TSLF operations have precipitated a significant narrowing of repo
spreads. More refined tests indicate the
market conditions and types of operations
associated with the program’s effectiveness. Various additional tests, including a
split-sample test, suggest that the authors’
findings are robust.
No. 427, January 2010
Performance Maximization of Actively
Managed Funds
Paolo Guasoni, Gur Huberman,
and Zhenyu Wang
Ratios that indicate the statistical significance of a fund’s alpha typically appraise
its performance. A growing literature
suggests that even in the absence of any
ability to predict returns, holding options
positions on the benchmark assets or
trading frequently can significantly
enhance performance ratios. This paper
derives the performance-maximizing
strategy—a variant of buy-write—and the
least upper bound on such performance
enhancement, thereby showing that if
common equity indexes are used as
benchmarks, the potential performance
enhancement from trading frequently is
usually negligible. The enhancement from
holding options can be substantial if the
implied volatilities of the options are
higher than the volatilities of the benchmark returns.
No. 429, January 2010
Central Bank Dollar Swap Lines
and Overseas Dollar Funding Costs
Linda S. Goldberg, Craig Kennedy,
and Jason Miu
Following a scarcity of dollar funding
available internationally to banks and
financial institutions, in December 2007
the Federal Reserve began to establish or
expand Temporary Reciprocal Currency
Arrangements with fourteen foreign central banks. These central banks had the
capacity to use these swap facilities to

provide dollar liquidity to institutions in
their jurisdictions. This paper presents the
developments in the dollar swap facilities
through the end of 2009. The facilities
were a response to dollar funding shortages outside the United States during a
period of market dysfunction. Formal
research, as well as more descriptive
accounts, suggests that the dollar swap
lines among central banks were effective
at reducing the dollar funding pressures
abroad and stresses in money markets.
The central bank dollar swap facilities are
an important part of the toolbox for dealing with systemic liquidity disruptions.

9
No. 431, February 2010
Financial Amplification Mechanisms and
the Federal Reserve’s Supply of Liquidity
during the Crisis
Asani Sarkar and Jeffrey Shrader
The small decline in the value of mortgagerelated assets relative to the large total
losses associated with the financial crisis
suggests the presence of financial amplification mechanisms, which allow relatively
small shocks to propagate through the
financial system. Sarkar and Shrader
review the literature on financial amplification mechanisms and discuss the
Federal Reserve’s interventions during
different stages of the crisis in light of this
literature. They interpret the Fed’s earlystage liquidity programs as working to
dampen balance sheet amplifications arising from the positive feedback between
financial constraints and asset prices. By
comparison, the Fed’s later-stage crisis
programs take into account adverseselection amplifications that operate via
increases in credit risk and the externality
imposed by risky borrowers on safe ones.
Finally, the authors provide new empirical
evidence that increases in the Federal
Reserve’s liquidity supply reduce interest
rates during periods of high liquidity risk.
Their analysis has implications for the
impact on market prices of a potential
withdrawal of liquidity supply by the Fed.

Research and Statistics Group

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Number 1, 2010

No. 437, March 2010
Stressed, Not Frozen: The Federal Funds
Market in the Financial Crisis
Gara Afonso, Anna Kovner,
and Antoinette Schoar

10

This paper examines the impact of the
financial crisis of 2008, specifically the
bankruptcy of Lehman Brothers, on the
federal funds market. The authors find that
amounts and spreads became more sensitive to a borrowing bank’s characteristics,
lending rates increased, and banks became
more restrictive in their choice of counterparties. The market did not seem to expand
to meet the increased demand predicted by
the drop in other bank funding markets.
Afonso, Kovner, and Schoar examine
discount window borrowing as a proxy for
unmet fed funds demand and find that
the fed funds market is not indiscriminate.
As expected, borrowers who access the
discount window have a lower return on
assets. On the lender side, the characteristics
of the lending bank do not seem to significantly affect the amount of interbank loans
it makes. In particular, the authors do not
find that worse-performing banks began
hoarding liquidity and indiscriminately
reducing their lending.
No. 438, March 2010
Liquidity-Saving Mechanisms in
Collateral-Based RTGS Payment Systems
Marius Jurgilas and Antoine Martin
This paper studies banks’ incentives for
choosing the timing of their payment submissions in a collateral-based real-time
gross settlement payment system and the
way in which these incentives change with
the introduction of a liquidity-saving mechanism (LSM). Jurgilas and Martin show
that an LSM allows banks to economize on
collateral while also providing incentives to
submit payments earlier. The reason is that,

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

in their model, an LSM allows payments to
be matched and offset, helping to settle
payment cycles in which each bank must
receive a payment that provides sufficient
funds to allow the settlement of its own
payment. In contrast to fee-based systems,
for which Martin and McAndrews (2008a)
show that introducing an LSM can lead
to lower welfare, in the authors’ model
welfare is always higher with an LSM in a
collateral-based system.
No. 439, March 2010
The Changing Nature of Financial
Intermediation and the Financial Crisis
of 2007-09
Tobias Adrian and Hyun Song Shin
The financial crisis of 2007-09 highlighted
the changing role of financial institutions
and the growing importance of the “shadow
banking system,” which grew out of the
securitization of assets and the integration
of banking with capital market developments. This trend was most pronounced in
the United States, but it also had a profound influence on the global financial
system as a whole. In a market-based
financial system, banking and capital
market developments are inseparable, and
funding conditions are tied closely to
fluctuations in the leverage of marketbased financial intermediaries. Balance
sheet growth of market-based financial
intermediaries provides a window on
liquidity by indicating the availability
of credit, while contractions of balance
sheets have tended to precede the onset of
financial crises. The authors describe the
changing nature of financial intermediation in the market-based financial system,
chart the course of the recent financial
crisis, and outline the policy responses
that have been implemented by the
Federal Reserve and other central banks.

www.newyorkfed.org/research

No. 441, March 2010
Large-Scale Asset Purchases by the
Federal Reserve: Did They Work?
Joseph Gagnon, Matthew Raskin,
Julie Remache, and Brian Sack
Since December 2008, the Federal Reserve’s
traditional policy instrument, the target
federal funds rate, has been effectively at
its lower bound of zero. In order to further
ease the stance of monetary policy as the
economic outlook deteriorated, the Federal
Reserve purchased substantial quantities
of assets with medium and long maturities.

The authors explain how these purchases
were implemented and discuss the mechanisms
through which they can affect the economy.
They present evidence that the purchases
led to economically meaningful and longlasting reductions in longer term interest
rates on a range of securities, including
securities that were not included in the
purchase programs. These reductions in
interest rates primarily reflect lower risk
premiums, including term premiums,
rather than lower expectations of future
short-term interest rates. ■

11

Recently Published
Stefano Eusepi. 2010. “Central Bank
Communication and the Liquidity Trap.”
Journal of Money, Credit, and Banking 42,
no. 2-3 (March-April): 373-97.

Simon Potter. 2010. “Modeling the Dynamics
of Inflation Compensation,” with Markus
Jochmann and Gary Koop. Journal of
Empirical Finance 17, no. 1 (January): 157-67.

Andrea Ferrero. 2010. “Current Account
Dynamics and Monetary Policy,” with
Mark Gertler and Lars E. O. Svensson.
In Jordi Galí and Mark Gertler, eds.,
International Dimensions of Monetary
Policy, 199-244. NBER conference volume.
Chicago: University of Chicago Press.

Robert Rich and Joseph Tracy. 2010. “The
Relationships among Expected Inflation,
Disagreement, and Uncertainty: Evidence
from Matched Point and Density Forecasts.”
Review of Economics and Statistics 92, no. 1
(February): 200-7.

Anna Kovner. 2010. “Buy Local? The
Geography of Venture Capital,” with
Henry Chen, Paul Gompers, and Josh Lerner.
Journal of Urban Economics 67, no. 1
(January): 90-102.

Argia Sbordone. 2010. “Globalization and
Inflation Dynamics: The Impact of Increased
Competition.” In Jordi Galí and Mark Gertler,
eds., International Dimensions of Monetary
Policy, 547-79. NBER conference volume.
Chicago: University of Chicago Press. ■

Hamid Mehran and Stavros Peristiani. 2010.
“Financial Visibility and the Decision to Go
Private.” Review of Financial Studies 23,
no. 2 (February): 519-47.

Research and Statistics Group

Research Update

■

Number 1, 2010

Papers Presented by Economists in the Research and Statistics Group
“Productivity and the Density of Human
Capital,” Jaison Abel. Southern Regional
Science Association annual meeting,
Washington, D.C., March 27. With Ishita
Dey and Todd Gabe.
“Precautionary Demand and Liquidity in
Payment Systems,” Gara Afonso. Bank of
Mexico seminar, Mexico City, Mexico,
March 4. With Hyun Song Shin.

12

“Aggregation and the PPP Puzzle in a
Sticky-Price Model,” Carlos Carvalho.
Harvard University International Economics
Workshop, Cambridge, Massachusetts,
February 24. With Fernanda Nechio.
“Estimating the Cross-Sectional Distribution
of Price Stickiness from Aggregate Data,”
Carlos Carvalho. American Economic
Association–Allied Social Science
Associations annual meeting, Atlanta,
Georgia, January 5. With Niels Dam.

“The Great Escape? A Quantitative
Investigation of the Fed’s Nonstandard
Policies,” Marco Del Negro, Gauti
Eggertsson, and Andrea Ferrero. With
Nobuhiro Kiyotaki. Presented by Ferrero
at a Bank of Portugal seminar, Lisbon,
Portugal, February 17, and at the NBER
Program on Monetary Economics meeting,
held at the Federal Reserve Bank of
New York, New York City, March 5.
Presented by Del Negro at the Federal
Reserve Bank of San Francisco Conference
on Financial Market Imperfections and
Macroeconomics, San Francisco,
California, March 5.
“Repo Market Effects of the Term
Securities Lending Facility,” Michael
Fleming. American Economic
Association–Allied Social Science
Associations annual meeting, Atlanta,
Georgia, January 3.

“Do Charter Schools Crowd Out Private
Enrollment?” Rajashri Chakrabarti.
American Economic Association–Allied
Social Science Associations annual
meeting, Atlanta, Georgia, January 4.
With Joydeep Roy.

“Central Bank Dollar Swap Lines and
Overseas Dollar Funding Costs,” Linda
Goldberg. American Economic
Association–Allied Social Science
Associations annual meeting, Atlanta,
Georgia, January 4. With Craig Kennedy
and Jason Miu.

“Effect of Constraints on Tiebout
Competition,” Rajashri Chakrabarti.
American Education Finance Association
conference, Richmond, Virginia, March 19.
With Joydeep Roy. Also presented at the
NBER Fiscal Federalism Conference,
San Diego, California, March 27.

“Global Banks and International Shock
Transmission: Evidence from the Crisis,”
Linda Goldberg. International Monetary
Fund–Banque de France Conference on
Economic Linkages, Spillovers, and the
Financial Crisis, Paris, France, January 28.
With Nicola Cetorelli.

“The Effects of No Child Left Behind on
Public Schools,” Rajashri Chakrabarti.
American Education Finance Association
conference, Richmond, Virginia, March 20.

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

“Historical Evolution of International
Banking,” Linda Goldberg. Presentation to
the Working Group of the Committee on
the Global Financial System, Bank for
International Settlements, Frankfurt,
Germany, March 12.
“Micro, Macro, and Strategic Forces in
International Trade Invoicing,” Linda
Goldberg. Fifth Annual Workshop on
Global Interdependence, cosponsored by
the Centre for Economic Policy Research
and Deutsche Bundesbank, Eltville,
Germany, March 12. With Cédric Tille.
“Bailouts and Financial Fragility,” Todd
Keister. IESE Business School Workshop
on Industrial Organization and Banking,
University of Navarra, Barcelona, Spain,
March 9.
“Banking Panics and Policy Responses,”
Todd Keister. European University
Institute Macroeconomics Workshop,
Florence, Italy, January 25.
“A Life Cycle Model of Trans-Atlantic
Employment Experiences,” Sagiri Kitao.
American Economic Association–Allied
Social Science Associations annual meeting,
Atlanta, Georgia, January 4. With
Lars Ljungqvist and Thomas Sargent.

“Compensation and Leverage,” Hamid
Mehran. University of Cambridge seminar,
Cambridge, United Kingdom, January 21.
“Rollover Risk during the Crisis,”
Asani Sarkar. American Economic
Association–Allied Social Science
Associations annual meeting, Atlanta,
Georgia, January 3. With Angelo Ranaldo.
“MBS Ratings and the Mortgage Credit
Boom,” James Vickery. American Economic
Association–Allied Social Science
Associations annual meeting, Atlanta,
Georgia, January 4. With Adam Ashcraft
and Paul Goldsmith-Pinkham. Also
presented at a Kenan-Flagler School of
Business seminar, University of North
Carolina at Chapel Hill, Chapel Hill, North
Carolina, February 19, and a Haas School
of Business seminar, University of California
at Berkeley, Berkeley, California, February 24.
“Do Female Faculty Influence Female
Students’ Choice of College Major, and
Why?” Basit Zafar. American Economic
Association–Allied Social Science
Associations annual meeting, Atlanta,
Georgia, January 4. With Yi Qian. ■

Research and Statistics Group

13

Research Update

■

Number 1, 2010

Research and Statistics Group
Publications and Papers:
January-March 2010

CURRENT ISSUES IN
ECONOMICS AND FINANCE,
VOL. 16

Publications are available at
www.newyorkfed.org/research/
publication_annuals/index.html.

No. 1, January 2010
Is the International Role of the Dollar
Changing?
Linda S. Goldberg

ECONOMIC POLICY REVIEW

No. 2, February 2010
The Unemployment Gender Gap
during the 2007 Recession
Ayşegül Şahin, Joseph Song,
and Bart Hobijn

Forthcoming

14

Policy Analysis Using DSGE Models:
An Introduction
Argia M. Sbordone, Andrea Tambalotti,
Krishna Rao, and Kieran Walsh
Special Issue: Central Bank Liquidity Tools
and Perspectives on Regulatory Reform

Central Bank Liquidity Tools
Opening Remarks
Patricia C. Mosser
Conference Overview and Summary
of Proceedings
Matthew Denes, Daniel Greenwald,
Nicholas Klagge, Ging Ce Ng, Jeffrey
Shrader, Michael Sockin, and John Sporn
Central Bank Tools and Liquidity
Shortages
Stephen G. Cecchetti and Piti Disyatat
Provision of Liquidity through the
Primary Credit Facility during the
Financial Crisis: A Structural Analysis
Erhan Artuç and Selva Demiralp
Perspectives on Regulatory Reform
Informational Easing: Improving
Credit Conditions through the
Release of Information
Matthew Pritsker
Systemic Risk and Deposit
Insurance Premiums
Viral V. Acharya, João A. C. Santos,
and Tanju Yorulmazer

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

No. 3, March 2010
Bypassing the Bust: The Stability
of Upstate New York’s Housing
Markets during the Recession
Jaison R. Abel and Richard Deitz

STAFF REPORTS
No. 421, January 2010
Monetary Cycles, Financial Cycles,
and the Business Cycle
Tobias Adrian, Arturo Estrella,
and Hyun Song Shin
No. 422, January 2010
Financial Intermediation, Asset Prices,
and Macroeconomic Dynamics
Tobias Adrian, Emanuel Moench,
and Hyun Song Shin
No. 423, January 2010
The Federal Reserve’s Commercial Paper
Funding Facility
Tobias Adrian, Karin Kimbrough,
and Dina Marchioni
No. 424, January 2010
Policy Perspectives on OTC Derivatives
Market Infrastructure
Darrell Duffie, Ada Li, and Theo Lubke
No. 425, January 2010
The Measurement of Rent Inflation
Jonathan McCarthy and Richard W. Peach

www.newyorkfed.org/research

No. 426, January 2010
Repo Market Effects of the Term
Securities Lending Facility
Michael J. Fleming, Warren B. Hrung,
and Frank M. Keane
No. 427, January 2010
Performance Maximization of Actively
Managed Funds
Paolo Guasoni, Gur Huberman,
and Zhenyu Wang
No. 428, January 2010
Macro Risk Premium and Intermediary
Balance Sheet Quantities
Tobias Adrian, Emanuel Moench,
and Hyun Song Shin
No. 429, January 2010
Central Bank Dollar Swap Lines
and Overseas Dollar Funding Costs
Linda S. Goldberg, Craig Kennedy,
and Jason Miu
No. 430, February 2010
Loss Aversion, Asymmetric Market
Comovements, and the Home Bias
Kevin Amonlirdviman and Carlos Carvalho
No. 431, February 2010
Financial Amplification Mechanisms
and the Federal Reserve’s Supply
of Liquidity during the Crisis
Asani Sarkar and Jeffrey Shrader
No. 432, February 2010
Subprime Mortgage Lending in New York
City: Prevalence and Performance
Ebiere Okah and James Orr
No. 433, February 2010
The Paradox of Toil
Gauti Eggertsson

No. 434, February 2010
Correlated Disturbances
and U.S. Business Cycles
Vasco Cúrdia and Ricardo Reis
No. 435, February 2010
Labor-Dependent Capital Income
Taxation That Encourages Work
and Saving
Sagiri Kitao
No. 436, March 2010
Social Security, Benefit Claiming, and
Labor Force Participation: A Quantitative
General Equilibrium
Approach
.
Selahattin I mrohoro glu and Sagiri Kitao
No. 437, March 2010
Stressed, Not Frozen: The Federal Funds
Market in the Financial Crisis
Gara Afonso, Anna Kovner,
and Antoinette Schoar
No. 438, March 2010
Liquidity-Saving Mechanisms in
Collateral-Based RTGS Payment Systems
Marius Jurgilas and Antoine Martin
No. 439, March 2010
The Changing Nature of Financial
Intermediation and the Financial Crisis
of 2007-09
Tobias Adrian and Hyun Song Shin
No. 440, March 2010
Productivity and the Density
of Human Capital
Jaison R. Abel, Ishita Dey,
and Todd M. Gabe
No. 441, March 2010
Large-Scale Asset Purchases by the
Federal Reserve: Did They Work?
Joseph Gagnon, Matthew Raskin,
Julie Remache, and Brian Sack

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

15