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ResearchUPDATE

federal reserve bank of new york ■■ Number 1,
3, 2011
2009

www.newyorkfed.org/research
www.newyorkfed.org/research

Research and Statistics Group

Research Group Launches
Liberty Street Economics Blog

he Research and Statistics Group recently
launched a new blog, Liberty Street
Economics, named after the street where
the New York Fed is located. The blog
complements our existing publications by providing
a way for economists to engage with the public on
issues quickly and frequently. The less technical style
Liberty Street Economics of the blog posts makes the insights
from the economists’ research
publishes reader accessible to an even broader audience.
comments and author
The blog includes posts on diverse
issues
and from a wide variety of
responses in the hope of
perspectives, featuring research by the
generating dialogue with Group’s more than sixty economists.
the public. We encourage This staff of active researchers supour Research Update ports Fed policymaking by providing
followers to offer analytical insight into a range of public
policy issues and pursuing research on
their comments. fundamental questions in economics
and finance. In the course of their work at the Bank,
economists develop expertise on a wide range of
economic issues: international economics, asset
pricing, corporate finance, banking, macroeconomics,
monetary economics, fiscal policy, microeconomics,
regional economics, and more. The blog supports the
Bank’s commitment to sharing this research and
analysis with the public in an accessible and timely
way.
Recent posts include topics such as the decline in
consumer indebtedness attributable to deleveraging—
a process whereby consumers borrow less and pay off

debt more quickly; how the rise in commodity prices will
affect discretionary income; why central banks have
discount windows; the tri-party repo m
arket, which
took on particular importance in relation to the
failures and near-failures of several financial
institutions; and potential causes of the recent rise in
consumer inflation expectations.
The blog will publish new analytical posts twice
per week, on Mondays and Wednesdays, except during
holidays and the sensitive period leading up to, and
just following, the FOMC meetings. On Fridays, the
Research Library will provide a historical reading.
Liberty Street Economics publishes reader
comments and author responses in the hope of generating
dialogue with the public. We encourage our Research
Update followers to read our posts and offer their
comments.
libertystreeteconomics.newyorkfed.org/

Also in this issue…
Liquidity facilities make a positive
contribution to Federal Reserve income................2
Study examines possible contributions
to rise in subprime foreclosures..............................3
Papers recently published by
Research Group economists����������������������������������� 3
Papers presented at conferences���������������������������������� 4
Most downloaded publications����������������������������������� 5
Staff Reports: New titles������������������������������������������������ 5
Publications and papers: January-March������������������� 8

Research UPDATE n Number 1, 2011

Liquidity Facilities Make a Positive Contribution
to Federal Reserve Income

for the additional credit risk the Federal Reserve
incurred in connection with the facilities. However,
the Fed took many facility-specific steps to minimize
that risk, such as establishing eligibility criteria for
borrowers, providing the loans on a short-term basis,
and requiring that loans be backed by adequate
collateral. Indeed, the Federal Reserve has not borne
any credit losses through its new or expanded
liquidity facilities, according to the study.
Fleming and Klagge emphasize that although
income generation is not a goal of the Fed’s policies,
the central bank uses such income to cover its expenses.
Furthermore, any excess income produced, such as
income derived from the liquidity facilities, is turned
over to the Treasury, offsetting the government’s need
to raise funds from other sources.
“Income Effects of Federal Reserve Liquidity
Facilities,” Current Issues in Economics and Finance,
vol. 17, no. 1, is available at www.newyorkfed.org/
research/current_issues/ci17-1.html. An interview
with the authors can also be viewed there. n

fter the onset of the financial crisis in
August 2007, the Federal Reserve took a
range of actions to mitigate disruptions
in the financial markets. In addition
to providing support for specific institutions and
making direct purchases of assets, the central bank
introduced new facilities or expanded existing ones
to provide liquidity to the funding markets. While
many researchers have found that the liquidity
facilities helped foster stable financial conditions
and preserve the flow of credit in the economy
during the crisis, a recent study suggests that the
programs also earned considerable income.
Authors Michael J. Fleming and Nicholas J. Klagge
examine the effects of the liquidity f acilities on the
Federal Reserve’s interest and fee income during the
period of the facilities’ greatest usage, August 2007
through December 2009. They estimate that the
programs contributed $20 billion to the Fed’s interest
and fee income during the period, or $13 billion after
taking into account the estimated $7 billion cost of funds.
The authors observe that some of the extra
income generated should be viewed as compensation

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
■■ Second

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

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.

federal reserve bank of new york
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www.newyorkfed.org/research

Study Examines Possible Contributors to Rise
in Subprime Foreclosures

he Bankruptcy Abuse Prevention and
Consumer Protection Act was enacted in
part to curb consumer bankruptcy abuse
by introducing requisites for debtors
seeking to eliminate certain unsecured debts. After
the reform took effect in October 2005, however,
foreclosures on subprime mortgages surged
nationwide.
In a new study, Donald P. Morgan, Benjamin
Iverson, and Matthew Botsch analyze whether the
surge was merely coincidental, or whether the reform,
which they refer to as “BAR,” may have played a role.
They observe that prior to BAR, overly indebted
borrowers could file bankruptcy to discharge their
unsecured debts, enabling them to retain more
income to pay secured debts, such as home mortgages.
The reform eliminated that option for better-off filers
through a means test and other requirements, and the
filers found it more difficult to save their home by
filing bankruptcy. Morgan, Iverson, and Botsch
consider whether the fact that it was harder for
borrowers to default on unsecured debts contributed
to higher foreclosures on their home loans.
The study concludes that BAR may have been
one of several contributors to the rise in subprime

foreclosures, joining declining home prices, expanded
mortgage supply, looser lending standards, and
agency problems associated with securitization.
The authors find that BAR’s impact on filers was
greater in states with a high incidence of bankruptcy
exemptions. In contrast, filers in low-exemption states
were not very protected before BAR, so they were
less likely to be affected. For a state with an average
home equity exemption, the authors estimate that the
subprime foreclosure rate post-BAR rose 11 percent
relative to average before the reform; given the
number of subprime mortgages in the United States,
that figure translates into 29,000 additional subprime
foreclosures per quarter nationwide.
Still, BAR still may have served its intended
purpose of curbing bankruptcy abuse, according to
the study. The strategy that BAR precludes in some
cases is defaulting on unsecured debts to make it
easier to pay secured debts; if “robbing Peter to pay
Paul” constitutes abuse, then the reform may have
worked.
“Subprime Foreclosures and the 2005 Bankruptcy Reform,” forthcoming in the Economic Policy
Review, is available at www.newyorkfed.org/research/
epr/forthcoming/1102morg.html.

Recently Published
Adam Copeland. 2011. “The Response of Prices, Sales,
and Output to Temporary Changes in Demand,” with
George Hall. Journal of Applied Econometrics 26, no. 2
(March): 232-69.

Developments.” In Takatoshi Ito and Andrew K.
Rose, eds., Commodity Prices and Markets. East Asia
Seminar on Economics 20: 15-42. NBER conference
volume. Chicago: University of Chicago Press.

Vasco Cúrdia. 2011. “The Central-Bank Balance Sheet
as an Instrument of Monetary Policy,” with Michael
Woodford. Journal of Monetary Economics 58, no. 1
(January): 54-79.

Paolo Pesenti. 2011. Comment on “The International
Transmission of the Financial Crisis,” by Jean Pisani-Ferry
and Adam Posen. In Jean Pisani-Ferry, Adam Posen,
and Fabrizio Saccomanni, eds., An Ocean Apart?
Comparing Transatlantic Responses to the Financial
Crisis. Brussels: Bruegel. n

Jan Groen and Paolo Pesenti. 2011. “Commodity
Prices, Commodity Currencies, and Global Economic

RESEARCH AND STATISTICS GROUP
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Research UPDATE n Number 1, 2011

Papers Presented
Education Finance and Policy Annual Conference,
Seattle, Washington, March 24.

“Broker-Dealer Leverage and the Cross-Section of
Stock-Returns,” Tobias Adrian. Conference cosponsored by the Center for Central Banking Studies and
the Financial Markets Group, held at the Bank of
England, London, England, January 25. With Erkko
Etula and Tyler Muir. Also presented at the New York
Stock Exchange Third Annual Conference on Hedge
Funds, New York City, January 27.

“Vouchers, Responses, and the Test-Taking Population:
Evidence from a Regression Discontinuity Analysis,”
Rajashri Chakrabarti. American Economic Association Annual Meeting, Denver, Colorado, January 8.
“House Price Booms and Current Account Deficits,”
Andrea Ferrero. INSEAD conference, Fontainebleau,
France, March 15. Also presented at the Paris School
of Economics and Sciences Po, Paris, France, March 16.

“Risk Appetite and Exchange Rates,” Tobias Adrian.
International Banking Economics and Finance
Association Annual Meeting, Denver, Colorado,
January 8. With Erkko Etula and Hyun Song Shin.

“What Drives the Oil-Dollar Correlation?” Christian
Grisse. American Economic Association Annual
Meeting, Denver, Colorado, January 9.

“Shadow Banking,” Tobias Adrian. International
Banking Economics and Finance Society Annual
Meeting, Denver, Colorado, January 7. With Zoltan
Pozsar, Adam Ashcraft, and Hayley Boesky. Also
presented at the Association of Financial Economists–
American Economic Association Annual Meeting,
Denver, Colorado, January 8, and at a Boston University
Center for Finance, Law, and Policy conference,
Boston, Massachusetts, February 27.

“Fundamentals-Based Exchange Rate Prediction
Revisited,” Jan Groen. Baruch College Zicklin School
of Business seminar, New York City, March 23.
“Financial Fragility and Regulation: A DiamondDybvig View,” Todd Keister. Conference hosted by the
Center for Advanced Study in Economic Efficiency,
held at Arizona State University, Tempe, Arizona,
February 12.

“Stigma in Financial Markets: Evidence from Liquidity
Auctions and Discount Window Borrowing during
the Crisis,” Olivier Armantier. Federal Reserve DayAhead Conference on Financial Markets and Institutions, held at the Federal Reserve Bank of Kansas City,
Kansas City, Missouri, January 6. With Eric Ghysels,
Asani Sarkar, and Jeffrey Shrader.

“Stressed, Not Frozen: The Federal Funds Market in
the Financial Crisis,” Anna Kovner. American Finance
Association Annual Meeting, Denver, Colorado,
January 7. With Gara Afonso and Antoinette Schoar.
“Potential and Optimal Output,” Andrea Tambalotti.
Cornell University Department of Economics
seminar, Ithaca, New York, February 24. With
Alejandro Justiniano and Giorgio Primiceri.

“State-Dependent Pricing under Infrequent
Information: A Unified Framework,” Carlos Carvalho.
Econometric Society 2011 North American Winter
Meeting, Denver, Colorado, January 9.

“Credit Ratings and Security Prices in the Subprime
MBS Market,” James Vickery. American Economic
Association Annual Meeting, Denver, Colorado,
January 9. With Adam Ashcraft, Paul GoldsmithPinkham, and Peter Hull.

“Intended and Unintended Effects of No Child Left
Behind,” Rajashri Chakrabarti. American Economic
Association Annual Meeting, Denver, Colorado,
January 8. Also presented at the Association for
Education Finance and Policy Annual Conference,
Seattle, Washington, March 25.

“Design of Contingent Capital with a Stock Price
Trigger for Mandatory Conversion,” Zhenyu Wang.
Columbia University Law School seminar, New York
City, January 27. With Suresh Sundaresan. n

“Merit Aid Programs, Incentives, and Student
Mobility,” Rajashri Chakrabarti. Association for
federal reserve bank of new york
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www.newyorkfed.org/research

Most Downloaded Publications

SSRN website, first-quarter 2011:

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).

■■ “Traders’

Broker Choice, Market Liquidity, and
Market Structure,” by Sugato Chakravarty and
Asani Sarkar (Staff Reports, no. 28, August 1997) –
569 downloads

New York Fed website, first-quarter 2011:

■■ “Understanding

the Securitization of Subprime
Mortgage Credit,” by Adam B. Ashcraft and
Til Schuermann (Staff Reports, no. 318,
March 2008) – 553 downloads

■■ “Shadow Banking,” by Zoltan Pozsar, Tobias Adrian,

Adam Ashcraft, and Hayley Boesky (Staff Reports,
no. 458, July 2010) – 3,685 downloads
■■ “Understanding

the Securitization of Subprime
Mortgage Credit,” by Adam B. Ashcraft and
Til Schuermann (Staff Reports, no. 318,
March 2008) – 2,107 downloads

■■ “An

Empirical Analysis of Stock and Bond Market
Liquidity,” by Tarun Chordia, Asani Sarkar, and
Aranidhar Subrahmanyam (Staff Reports, no. 164,
March 2003) – 545 downloads

■■ “The

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

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) – 1,845 downloads

New Titles in the Staff Reports Series
Macroeconomics and Growth

collateral in the marketplace. The authors find that the
TSLF is uniquely effective relative to other policies
and that, while changes in Treasury collateral do
affect repo rates, the impacts are not equivalent
across sources of Treasury collateral.

No. 481, January 2011
Responses to the Financial Crisis, Treasury Debt,
and the Impact on Short-Term Money Markets
Warren B. Hrung and Jason S. Seligman

No. 485, February 2011
BASEL III: Long-Term Impact on Economic
Performance and Fluctuations
Paolo Angelini, Laurent Clerc, Vasco Cúrdia,
Leonardo Gambacorta, Andrea Gerali, Alberto
Locarno, Roberto Motto, Werner Roeger, Skander
Van den Heuvel, and Jan Vlček

Several programs have been introduced by U.S. fiscal
and monetary authorities in response to the financial
crisis. Hrung and Seligman examine the responses
involving Treasury debt—the Term Securities
Lending Facility (TSLF), the Supplemental Financing
Program, increases in Treasury issuance, and open
market operations—and their impacts on the overnight Treasury general collateral repo rate, a key
money market rate. Their contribution is to consider
each policy in light of the others, both to help guide
policy responses to future crises and to emphasize
policy interactions. Only the TSLF was designed to
directly address stresses in short-term money markets
by temporarily changing the supply of Treasury

The authors assess the long-term economic impact
of the new regulatory standards (the Basel III reform),
answering the following questions: 1) What is the
impact of the reform on long-term economic
performance? 2) What is the impact of the reform on
economic fluctuations? 3) What is the impact of the
adoption of countercyclical capital buffers on
economic fluctuations? The main results are the
RESEARCH AND STATISTICS GROUP
5

Research UPDATE n Number 1, 2011
No. 486, March 2011
Vouchers, Responses, and the Test-Taking
Population: Regression Discontinuity Evidence
from Florida
Rajashri Chakrabarti

following: 1) Each percentage point increase in the
capital ratio causes a median 0.09 percent decline in
the level of steady-state output, relative to the
baseline. The impact of the new liquidity regulation is
of a similar order of magnitude, at 0.08 percent.
2) The reform should dampen output volatility; the
magnitude of the effect is heterogeneous across
models; the median effect is modest. 3) The adoption
of countercyclical capital buffers could have a more
sizable dampening effect on output volatility.

This paper analyzes a Florida program that embedded
vouchers in an accountability regime. Specifically, it
investigates whether the threat of vouchers and the
stigma associated with the Florida program induced
schools to strategically manipulate their test-taking
population. Under Florida rules, scores of students in
several special-education and limited-Englishproficient (LEP) categories were not included in the
computation of school grades. Did this rule induce
the threatened schools to reclassify some of their
weaker students into these “excluded” categories so as
to remove them from the effective test-taking pool?
Using a regression discontinuity strategy, Chakrabarti
finds evidence in favor of strategic reclassification into
the excluded LEP category in high-stakes grade 4 and
entry-grade 3. In contrast, she finds no evidence that
the program led to reclassification into excluded
special-education categories, which is consistent with
the substantial costs of classifying into special-education
categories during this period. These findings have
important policy implications.

Microeconomics
No. 482, January 2011
Household Debt and Saving during
the 2007 Recession
Rajashri Chakrabarti, Donghoon Lee,
Wilbert van der Klaauw, and Basit Zafar
Using credit report records and data collected from
several household surveys, the authors analyze changes
in household debt and saving during the 2007 recession. They find that the crisis’ impact appears to have
been widespread, affecting large shares of households
across all age, income, and education groups. In
response to their deteriorated financial situations,
households reduced their average spending and
increased their saving. This increase in saving—at
least in 2009—did not materialize through an increase
in contributions to retirement and savings accounts.
Instead, the higher saving rate appears to reflect a
considerable decline in household debt, as households
paid down mortgage debt in particular. At the end
of 2009, individuals expected to continue i ncreasing
their saving and paying down debt—expectations that
are consistent with what the authors have observed so
far in 2010. In contrast, consumers were pessimistic
about the availability of credit, expecting it to become
harder to obtain during 2010.

Banking and Finance

No. 483, January 2011
Stigma in Financial Markets: Evidence from
Liquidity Auctions and Discount Window
Borrowing during the Crisis
Olivier Armantier, Eric Ghysels, Asani Sarkar,
and Jeffrey Shrader
The authors provide empirical evidence for the
existence, magnitude, and economic impact of stigma
associated with banks borrowing from the Federal
Reserve’s discount window facility. They find that,
during the height of the financial crisis, banks were
willing to pay an average premium of at least 37 basis
points (and 150 basis points after Lehman’s bankruptcy)
to borrow from the Term Auction Facility rather than
from the discount window. The incidence of stigma
varied according to bank characteristics and market

federal reserve bank of new york
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www.newyorkfed.org/research

Quantitative Methods

conditions. Finally, the authors find that discount
window stigma is economically relevant since it
increased banks’ borrowing costs during the crisis.
These results have important implications for the
provision of liquidity by central banks.

No. 487, March 2011
Central Bank Transparency and the Crowding
Out of Private Information in an Experimental
Asset Market
Menno Middeldorp and Stephanie Rosenkranz

No. 484, February 2011
Comovement Revisited
Maria Kasch and Asani Sarkar

Central banks have become increasingly communicative.
An important reason is that democratic societies
expect more transparency from public institutions.
Central bankers, drawing on empirical research, also
believe that sharing information has economic

benefits. Communication is seen as a way to improve
the predictability of monetary policy, thereby

lowering financial market volatility and contributing
to a more stable economy. However, a potential
side-effect of providing costless public information is
that market participants may be less inclined to invest
in private information. Theoretical results suggest that
this can hamper the ability of markets to predict
future monetary policy. Middeldorp and Rosenkranz
test this in a laboratory asset market. Crowding out of
information a cquisition does indeed take place, but
only where it is most pronounced does the predictive
ability of the market deteriorate. Notable features of
the experiment include a complex setup based directly
on the theoretical model and the calibration of experimental parameters using empirical measurements. n

Kasch and Sarkar find, unlike earlier researchers, that
there is no rise in the market betas of stocks that enter
the S&P 500 index when the estimated factor model is
that of Fama and French (1993). They also find that
SMB and HML factor betas decline after the stocks
are added to the index. This decline is explained by
strong increases in earnings and in the market value
of the event stocks in the period around—and, in
particular, prior to—their inclusion in the index. The
authors suggest that inclusions to the S&P 500 index
are informative events that trigger a reassessment of
the risk of newly added firms by drawing the broad
market’s attention to their extraordinary growth in
size and profitability.
No. 488, March 2011
Liquidity Hoarding
Douglas Gale and Tanju Yorulmazer
Banks hold liquid and illiquid assets. An illiquid bank
that receives a liquidity shock sells assets to liquid
banks in exchange for cash. Gale and Yorulmazer
characterize the constrained efficient allocation as
the solution to a planner’s problem and show that
the market equilibrium is constrained inefficient,
with too little liquidity and inefficient hoarding.
Their model features a precautionary as well as a
speculative motive for hoarding liquidity, but the
inefficiency of liquidity provision can be traced to the
incompleteness of markets (due to private information) and the increased price volatility that results
from trading assets for cash.

RESEARCH AND STATISTICS GROUP
7

Research and Statistics Group Publications and
Papers: January–March 2011
No. 484, February 2011
Comovement Revisited
Maria Kasch and Asani Sarkar

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

ECONOMIC POLICY REVIEW,
FORTHCOMING

Subprime Foreclosures and the 2005 Bankruptcy
Reform
Donald P. Morgan, Benjamin Iverson,
and Matthew Botsch

CURRENT ISSUES IN ECONOMICS
AND FINANCE, VOL. 17

No. 486, March 2011
Vouchers, Responses, and the Test-Taking
Population: Regression Discontinuity Evidence
from Florida
Rajashri Chakrabarti

No.1, January 2011
Income Effects of Federal Reserve Liquidity
Facilities
Emanuel Moench, James Vickery, and Diego Aragon

No. 487, March 2011
Central Bank Transparency and the Crowding
Out of Private Information in an Experimental
Asset Market
Menno Middeldorp and Stephanie Rosenkranz

STAFF REPORTS
No. 481, January 2011
Responses to the Financial Crisis, Treasury Debt,
and the Impact on Short-Term Money Markets
Warren B. Hrung and Jason S. Seligman

No. 488, March 2011
Liquidity Hoarding
Douglas Gale and Tanju Yorulmazer

No. 482, January 2011
Household Debt and Saving during
the 2007 Recession
Rajashri Chakrabarti, Donghoon Lee,
Wilbert van der Klaauw, and Basit Zafar
No. 483, January 2011
Stigma in Financial Markets: Evidence from
Liquidity Auctions and Discount Window
Borrowing during the Crisis
Olivier Armantier, Eric Ghysels, Asani Sarkar,
and Jeffrey Shrader

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.
8

Full text of Research Update : Number 1, 2011

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