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

Liberty Street Economics Blog Examines Student
Loans and Soaring Tuition Costs

S

tudent loans have received considerable
media attention in recent months, as
researchers and policymakers voice growing
concern about the heavy debt loads assumed
by students and, in many cases, their parents.
Additionally, college enrollments have increased,
and there is concern about the availability of federal,
state, and local aid to support the large number of
students taking up postsecondary education.
To inform the public and policymakers, the
Liberty Street Economics blog recently examined two
timely education topics: the student loan market and
the relationship between cuts in public funding for
higher education and university tuition costs.
In their post, “Grading Student Loans,” Meta
Brown, Andrew Haughwout, Donghoon Lee, Maricar
Mabutas, and Wilbert van der Klaauw examine the
overall student loan debt market as of third-quarter
2011, and find it likely that delinquency rates for these
loans are understated.
As the bloggers observe, student loans receive
special accounting treatment that is not applicable to
other types of consumer debt, such as credit card debt
or auto loans. In the case of federally backed student
loans, which represent a majority of total lending,
repayment is deferred until the student graduates, and
can be pushed back by six months. Therefore, these
loans are not included in the past-due balance on
credit reports, but they do appear in the total balance
upon which the delinquency rate is derived. The
result is an understatement of delinquent student
loans, because a significant proportion of borrowers
and balances is not yet in the repayment cycle.

Tuition costs have also been on the rise, particularly for public universities and colleges. Since 2000,
state and local appropriations for these institutions
have declined, while net tuition has increased
substantially, both in real terms and relative to tuition
growth at private institutions. In their post, “Soaring
Tuitions: Are Public Funding Cuts to Blame?”
Rajashri Chakrabarti, Maricar Mabutas, and Basit
Zafar note that, as a share of total revenues for
America’s public institutions of higher education, state
and local appropriations have fallen every year over
the past decade while college enrollment has
increased.
Rising student debt levels and academic research
have brought greater scrutiny to the question of
whether the federal government’s expansion of
student-aid programs is driving up college tuition.
However, the bloggers suggest that public universities
are increasing tuition to make up for decreasing state

Also in this issue…
EPR article suggests ways to reduce weaknesses
and risk in tri-party repo market .......................2
New study explores allocation of government’s
economic stimulus package to New York and
New Jersey .............................................................3
Most downloaded publications ...............................4
Top blog posts of Q3 .................................................5
Papers recently published by
Research Group economists ...............................6
Papers presented at conferences ..............................7
Staff Reports: New titles ............................................8
Publications and posts: July–September ..............11

Research UPDATE ■ Number 3, 2012
and local appropriations, and that deeper cuts in
public funding may be associated with correspondingly greater tuition hikes, particularly in recent years.
They note that this finding is troubling, since public
universities and colleges may face even greater
financial strain in the years to come, as federal funds
from the American Recovery and Reinvestment Act

wind down. For the college student, this means
shouldering more of the financial burden, including
the possibility of taking out even larger student loans.
The blog posts are available at
libertystreeteconomics.newyorkfed.org.

EPR Article Suggests Ways to Reduce Weaknesses
and Risk in Tri-Party Repo Market

T

he 2007-09 financial crisis shed light on
weaknesses in the design of the U.S. triparty repo market—weaknesses that could
rapidly elevate and propagate systemic
risk. A recent article in the Economic Policy Review
describes some of the key mechanics of the market,
focusing on two that have contributed to its fragility
and impacted reform efforts: the collateral allocation
process and the repo “unwind” process.
In “Key Mechanics of the U.S. Tri-Party Repo
Market,” Adam Copeland, Darrell Duffie, Antoine
Martin, and Susan McLaughlin explain that collateral allocation in the
tri-party repo market
currently takes a
considerable amount
of time and is complicated by the need
for coordination
between multiple
players. The time
required to allocate
Author Adam Copeland of the
Federal Reserve Bank of New York’s
collateral therefore
Research and Statistics Group
makes it difficult to
settle new and expiring repos simultaneously and to
reduce dealers’ reliance on credit from their clearing
banks.
Another impediment to reform, according to the
study, is the unwind process, or the settlement of

expiring and
continuing repos
that occurs before
new ones can be
settled and continuing ones can be
“rewound.” The time
gap between the
daily unwind and
Author Antoine Martin of the
rewind drives much
Research and Statistics Group
of dealers’ demand
for intraday credit from their clearing banks. The gap
leads to a twice-daily transfer of exposure from a
dealer’s investors to its clearing banks and vice-versa.
This “handoff ” can create a perverse dynamic if the
dealer comes under stress, as cash investors and the
clearing bank may want to be the first to reduce their
exposure to the dealer. Indeed, a reengineering of the
tri-party repo settlement process designed to be
much less reliant on intraday credit is a main goal of
current market reform.
The authors conclude that by improving the
collateral allocation process and eliminating the time
gap between the unwind and rewind of repos,
weaknesses in the tri-party repo market could be
reduced, as could the amount of financial system risk.
The article is available at www.newyorkfed.org/
research/epr/2012/1210cope.html.

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www.newyorkfed.org/research

New Study Explores Allocation of
Government’s Economic Stimulus
Package to New York and New Jersey

T

he 2009 American Recovery and Reinvestment Act (ARRA) was designed to spur
economic growth and strengthen the fiscal
condition of state governments through
a combination of tax cuts and increased federal aid
to the states. In a recent study in Current Issues in
Economics and Finance (vol. 18, no. 6), James Orr and
John Sporn show that in New York and New Jersey,
as in other states, the spending portion of the act supported a variety of social services and infrastructure
investments; however, the funds allocated to New
York were largely concentrated in expanded funding
for Medicaid, while a sizable share of the stimulus
funds in New Jersey went to extending unemployment insurance (UI) benefits.
The study, entitled “The American Recovery
and Reinvestment Act of 2009: A Review of Stimulus
Spending in New York and New Jersey,” begins with a
look at the size and structure of the program. ARRA
provided roughly $540 billion in federal spending and
about $300 billion in tax cuts, making it the largest
fiscal stimulus program in the past four decades. New
York received roughly $35 billion in stimulus spending and New Jersey about $12 billion. On a per capita
basis, the authors note, these amounts were broadly
consistent with the national average.
Within each funding category—including health,
education, housing assistance, and infrastructure
investment—the distribution of funds generally followed formulas governing existing federal transfers
to state governments. Spending on some programs,
however, was shaped by the nature and extent of the
downturn in individual states. According to Orr and
Sporn, spending in New York was allocated largely to

Author James Orr of the Federal Reserve Bank of
New York’s Research and Statistics Group

an expansion of Medicaid funding, reflecting the high
rate at which the state was reimbursed for Medicaid
expenses prior to ARRA’s introduction and the relatively broad coverage and wide participation in the
state’s Medicaid program.
In New Jersey, by contrast, spending was concentrated heavily in unemployment insurance. ARRA
funds supported additional weeks of UI benefits for
covered workers as well as broader eligibility for benefits. Orr and Sporn suggest that the concentration
of funds in this category reflected New Jersey’s steep
unemployment rate among insured workers and the
state’s high weekly benefit amounts.
Overall, stimulus spending boosted revenues in
New York State and New Jersey significantly in 2010
and 2011. By the end of 2011, however, most of the
ARRA funds had been paid out. In the future, the
authors note, New York and New Jersey can no longer
count on these federal transfers to strengthen their
fiscal positions. ■

RESEARCH AND STATISTICS GROUP
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Research UPDATE ■ Number 3, 2012

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).

SSRN website, third-quarter 2012:
■

“The Pre-FOMC Announcement ‘Drift,’” by David
Lucca and Emanuel Moench (Staff Reports, no. 512,
September 2011) – 915 downloads

■

“Determinants and Impact of Sovereign Credit
Ratings,” by Richard Cantor and Frank Packer
(Economic Policy Review, vol. 2, no. 2,
October 1996) – 177 downloads

■

“The Corporate Governance of Banks,” by Jonathan R.
Macey and Maureen O’Hara (Economic Policy
Review, vol. 9, no. 1, April 2003) – 167 downloads

New York Fed website, third-quarter 2012:
■

“Market Declines: What Is Accomplished by
Banning Short-Selling?” by Robert Battalio, Hamid
Mehran, and Paul Schultz (Current Issues in
Economics and Finance, vol. 18, no. 5, 2012) –
5,391 downloads

■

“The Minimum Balance at Risk: A Proposal to
Mitigate the Systemic Risks Posed by Money
Market Funds,” by Patrick McCabe, Marco
Cipriani, Michael Holscher, and Antoine Martin
(Staff Reports, no. 564, July 2012) – 4,514 downloads

■

“A Structural View of U.S. Bank Holding Companies,”
by Dafna Avraham, Patricia Selvaggi, and James
Vickery (Economic Policy Review, vol. 18, no. 2,
July 2012) – 4,313 downloads

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

Publications and Other Media
■

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.

■

The Research Group of the Federal Reserve Bank of New York—a guide for economists interested in joining
the Group, as well as an overview of our staff, structure, and functions.

■

Liberty Street Economics—a blog that enables our economists to engage with the public on important
economic topics quickly and frequently.

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www.newyorkfed.org/research

Top Blog Posts of Q3

O

ur Liberty Street Economics blog
publishes on economic topics twice a
week—more frequently when there is a
post on a newly released report or on
a pressing topic.

■

Garbade and McAndrews examine what might
happen if the interest rate paid by the Federal
Reserve on excess reserves were fixed below zero.

Listed below are the top five posts in the
third quarter.
■

■

“The Puzzling Pre-FOMC Announcement ‘Drift’,”
by David Lucca and Emanuel Moench, July 11 –
23,535 downloads

“Interest on Excess Reserves and Cash ‘Parked’ at
the Fed,” by Gaetano Antinolfi and Todd Keister,
August 27 – 7,117 downloads
Antinolfi and Keister use the structure of the Fed’s
balance sheet to illustrate why lowering the interest
rate paid on reserve balances to zero would have no
meaningful effect on the quantity of balances that
banks hold on deposit at the Fed.

Lucca and Moench show that since 1994, more
than 80 percent of the equity premium on U.S.
stocks has been earned over the twenty-four hours
preceding scheduled Federal Open Market Committee announcements, which occur only eight
times a year.
■

“If Interest Rates Go Negative…Or, Be Careful
What You Wish For,” by Kenneth Garbade and
Jamie McAndrews, August 29 – 10,691 downloads

■

“The Untold Story of Municipal Bond Defaults,”
by Jason Appleson, Eric Parsons, and Andrew
Haughwout, August 15 – 13,758 downloads

“Introducing a Series on the Evolution of Banks
and Financial Intermediation,” by Nicola Cetorelli,
July 16 – 3,510 downloads
Cetorelli summarizes our blog series on banks and
financial intermediation and previews key findings. ■

The authors find that in the municipal bond
market, defaults occur more frequently than what
the major rating agencies report.

Follow Us on Twitter!
The Research Group has a Twitter feed, designed to offer the first word on news going on in the Group,
such as:
■

new publications and blog posts,

■

updates on economists’ work and speaking engagements,

■

postings of key indexes and data,

■

media coverage of the Group’s work.

Follow us at @NYFedResearch

RESEARCH AND STATISTICS GROUP
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Research UPDATE ■ Number 3, 2012

Recently Published
Andrea Ferrero. 2012. “The Advantage of Flexible
Targeting Rules.” Journal of Money, Credit, and
Banking 44, no. 5 (August): 825-62.

Mary Amiti. 2012. “Trade Liberalization and the
Wage Skill Premium: Evidence from Indonesia,” with
Lisa Cameron. Journal of International Economics 87,
no. 2 (July): 277-87.

Andreas Fuster. 2012. “Natural Expectations,
Macroeconomic Dynamics, and Asset Pricing,” with
Benjamin Hebert and David Laibson. In Daron
Acemoglu and Michael Woodford, eds., NBER
Macroeconomics Annual 2011 26: 1-48. Chicago:
University of Chicago Press.

Olivier Armantier, Giorgio Topa, and Wilbert
van der Klaauw. 2012. “The Effect of Question
Wording on Consumers’ Reported Inflation
Expectations,” with Wändi Bruine de Bruin and Julie
S. Downs. Journal of Economic Psychology 33, no. 4
(August): 749-57.

Anna Kovner. 2012. “Do Underwriters Matter? The
Impact of the Near Failure of an Equity Underwriter.”
Journal of Financial Intermediation 21, no. 3
(July): 507-29.

Nina Boyarchenko. 2012. “Ambiguity Shifts and the
2007-2008 Financial Crisis.” Journal of Monetary
Economics 59, no. 5 (July): 493-507. Proceedings
of Robust Macroeconomic Policy, Carnegie-NYURochester Conference on Public Policy.
Bianca De Paoli. 2012. “Cyclical Precautionary Saving
and Monetary Policy,” with Pawel Zabczyk. European
Central Bank Research Bulletin 16, summer: 7-9.

Wilbert van der Klaauw. 2012. “Is Economics
Coursework, or Majoring in Economics, Associated
with Different Civic Behaviors?” with Sam Allgood,
William Bosshardt, and Michael Watts. Journal of
Economic Education 43, no. 3 (September): 248-68.

Bianca De Paoli. 2012. “Why Do Risk Premia Vary
over Time? A Theoretical Investigation under Habit
Formation,” with Pawel Zabczyk. Macroeconomic
Dynamics 16, suppl. s2 (September): 252-66.

Wilbert van der Klaauw. 2012. “On the Use of
Expectations Data in Estimating Structural Dynamic
Choice Models.” Journal of Labor Economics 30, no. 3
(July): 521-54. ■

Stefano Eusepi. 2012. “Debt, Policy Uncertainty,
and Expectations Stabilization,” with Bruce Preston.
Journal of the European Economic Association 10,
no. 4 (August): 860-86.

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www.newyorkfed.org/research

Papers Presented
“Financial Intermediary Leverage and Financial
Stability,” Tobias Adrian. G-20 Conference on
Financial Systemic Risk, held at the Central Bank of
Turkey, Istanbul, Turkey, September 27. With Nina
Boyarchenko.

“Expectations versus Fundamentals: Does the Cause
of Banking Panics Matter for Prudential Policy?”
Todd Keister. Cornell University Macroeconomics
Workshop, Ithaca, New York, July 16. With Vijay Narasiman.
“Macroeconomic Dimensions of Adjustment in the
Euro Area,” Paolo Pesenti. European Central Bank
and Bruegel Workshop on Economic Adjustment in
the Euro Area, Frankfurt, Germany, September 24.

“The Gender Unemployment Gap,” Stefania Albanesi.
Thirty-Fourth Annual NBER Summer Institute,
Macroeconomic Perspective Meeting, Cambridge,
Massachusetts, July 18. With Ayşegül Şahin.

“The Measurement and Behavior of Uncertainty:
Evidence from the ECB Survey of Professional
Forecasters,” Robert Rich. Info-Metrics Institute of
American University seminar, Washington, D.C.,
September 12. With Joseph Song and Joseph Tracy.

“Do Charter Schools Crowd Out Private School
Enrollment? Evidence from Michigan,” Rajashri
Chakrabarti. New York University seminar, New York
City, August 28. With Joydeep Roy.
“Rare Shocks, Great Recessions Forecasting Commodity Prices,” Marco Del Negro. Rimini Conference
on Economics and Finance, Toronto, Canada,
August 17. With Vasco Cúrdia and Daniel Greenwald.

“Dealer Financial Conditions and Lender-of-LastResort Facilities,” Asani Sarkar. Annual Meeting of
the European Finance Association, Copenhagen,
Denmark, August 16. With Michael Fleming and
Warren Hrung.

“Anxiety in the Face of Risk,” Thomas Eisenbach.
Annual Meeting of the Academy of Behavioral
Finance and Economics, New York City,
September 20. With Martin Schmalz.

“Anatomy of Welfare Reform Evaluation: Announcement and Implementation Effects,” Wilbert
van der Klaauw. New York University seminar,
New York City, September 17. With Richard Blundell
and Marco Francesconi.

“House Price Booms, Current Account Deficits, and
Low Interest Rates,” Andrea Ferrero. Central Bank of
Chile seminar, Santiago, Chile, July 27.

“Inflation Expectations and Behavior: Do Survey
Respondents Act on Their Beliefs?” Wilbert van der Klaauw.
Bank of England seminar, London, England, July 26.

“Liquidity Management in Global Banks,” Linda
Goldberg. Tuck School of Dartmouth College
seminar, Hanover, New Hampshire, August 24.
With Nicola Cetorelli.

“Securitization and the Fixed-Rate Mortgage,” James
Vickery. European Summer Symposium on Financial
Markets, Centre for Economic Policy Research,
Gerzensee, Switzerland, July 17. With Andreas Fuster.

“Forecasting Commodity Prices,” Jan Groen.
Conference on the Economics and Econometrics of
Commodity Prices, sponsored by the Getulio Vargas
Foundation and VALE, Rio de Janeiro, Brazil,
August 17. With Paolo Pesenti.

“How Deeply Held Are Anti-American Attitudes
among Pakistani Youth? Evidence Using Experimental
Variation in Information,” Basit Zafar. Thirty-Fourth
Annual NBER Summer Institute Political Economy
Meeting, Cambridge, Massachusetts, July 16. With
Adeline Delavande. Also presented at the ThirtyFourth Annual NBER Summer Institute, Economics
of National Security Meeting, Cambridge,
Massachusetts, July 23. ■

“Unemployment during the Great Recession: The
Role of the Housing Bust,” Fatih Karahan. European
Economic Association and Econometric Society 2012
Parallel Meetings, held at the University of Malaga,
Malaga, Spain, August 28.

RESEARCH AND STATISTICS GROUP
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Research UPDATE ■ Number 3, 2012

New Titles in the Staff Reports Series
Macroeconomics and Growth

on spatial segregation. The reform was a state
initiative intended to equalize per-pupil expenditures
between Michigan school districts and reduce the
role of local financing. The authors find that
Proposal A was responsible for increases in the value
of housing stock in the lowest-spending school
districts, and for improvements in several socioeconomic indicators in these districts, implying a decline
in neighborhood sorting. They also find that the
reform affected dispersion of incomes and educational
attainment within school districts, increasing
within-district heterogeneity in the lowest-spending
school districts, while decreasing the same in the
highest-spending districts. However, there is continued high demand for residence in the highest-spending
communities, suggesting the importance of neighborhood peer effects (“local” social capital) and implying
that even a comprehensive government aid program
can fail to make a large impact on residential segregation.

No. 563, July 2012
Federal Reserve Liquidity Provision during
the Financial Crisis of 2007-2009
Michael Fleming
This paper examines the Federal Reserve’s unprecedented liquidity provision during the financial crisis
of 2007-2009. It first reviews how the Fed provides
liquidity in normal times. It then explains how the
Fed’s new and expanded liquidity facilities were
intended to enable the central bank to fulfill its
traditional lender-of-last-resort role during the crisis
while mitigating stigma, broadening the set of
institutions with access to liquidity, and increasing
the flexibility with which institutions could tap such
liquidity. The paper then assesses the growing
empirical literature on the effectiveness of the
facilities and provides insights as to where further
research is warranted.
No. 566, August 2012
Mismatch Unemployment
Ayşegül Şahin, Joseph Song, Giorgio Topa, and
Giovanni L. Violante

No. 568, August 2012
Do Informal Referrals Lead to Better Matches?
Evidence from a Firm’s Employee Referral System
Meta Brown, Elizabeth Setren, and Giorgio Topa

Şahin et al. develop a framework where mismatch
between vacancies and job seekers across sectors
translates into higher unemployment by lowering the
aggregate job-finding rate. The authors use this
framework to measure the contribution of mismatch
to the recent rise in U.S. unemployment by exploiting
two sources of cross-sectional data on vacancies,
JOLTS and HWOL, a new database covering the
universe of online U.S. job advertisements. Mismatch
across industries and occupations explains at most
one-third of the total observed increase in the
unemployment rate, whereas geographical mismatch
plays no apparent role. The share of the rise in
unemployment explained by occupational mismatch
is increasing in the education level.

Using a new firm-level data set that includes explicit
information on whether a worker at the company was
referred by a current employee, Brown, Setren, and
Topa are able to provide rich detail on the empirical
relationships among employment referrals, match
quality, wage trajectories, and turnover for a single
U.S. corporation and to test various predictions of
theoretical models of labor market referrals. The
authors’ results align with the following predictions:
1) referred candidates are more likely to be hired,
2) referred workers experience an initial wage
advantage, 3) the wage advantage dissipates over
time, 4) referred workers have longer tenure in the
firm, and 5) the variances of the referred and
nonreferred wage distributions converge over time.
The richness of the data allows the authors to
analyze the role of referrer-referee relationships, and
the size and diversity of the corporation permit
analysis of referrals at a wide variety of skill and
experience levels.

Microeconomics
No. 565, August 2012
Housing Markets and Residential Segregation:
Impacts of the Michigan School Finance Reform
on Inter- and Intra-District Sorting
Rajashri Chakrabarti and Joydeep Roy
Chakrabarti and Roy study the impacts of the
Michigan school finance reform of 1994 (Proposal A)
FEDERAL RESERVE BANK OF NEW YORK
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www.newyorkfed.org/research
No. 573, September 2012
Abbott and Bacon Districts: Education Finances
during the Great Recession
Rajashri Chakrabarti and Sarah Sutherland

a portion of an investor’s MBR, creating a disincentive
to redeem if the fund is likely to have losses. In
normal times, when the risk of MMF losses is remote,
subordination would have little effect on incentives.

This paper exploits rich panel data and trend-shift
analysis to analyze how school finances in the
Abbott and Bacon School Districts in New Jersey,
as well as the high-poverty districts in general,
were affected during the Great Recession and the
American Recovery and Reinvestment Act federal
stimulus period. The authors’ analysis shows
downward shifts in revenue and expenditure per pupil
during the post-recession era in all three groups of
districts. However, the Abbott Districts showed the
sharpest declines in both revenue and expenditure
relative to preexisting trends. Of importance, the
Abbott Districts were the only group in the analysis to
show statistically significant negative shifts in
instructional expenditure (the expenditure category
most closely related to student learning), even with
the federal stimulus. Declines in noninstructional
categories were also the most prominent in the Abbott
Districts. With comparably less of a decline in state
and federal aid, the Bacon Districts maintained
spending across-the-board at higher levels than the
other groups did.

No. 567, August 2012
Intermediary Leverage Cycles and
Financial Stability
Tobias Adrian and Nina Boyarchenko
Adrian and Boyarchenko present a theory of financial
intermediary leverage cycles within a dynamic model
of the macroeconomy. Intermediaries face risk-based
funding constraints that give rise to procyclical
leverage. The pricing of risk varies as a function of
intermediary leverage, and asset return exposure to
intermediary leverage shocks earns a positive risk premium. Relative to an economy with constant leverage,
financial intermediaries generate higher consumption
growth and lower consumption volatility in normal
times, at the cost of endogenous systemic financial
risk. The severity of systemic crisis depends on intermediaries’ leverage and net worth. Regulations that
tighten funding constraints affect the systemic riskreturn trade-off by lowering the likelihood of systemic
crises at the cost of higher pricing of risk.
No. 569, August 2012
A New Look at Second Liens
Donghoon Lee, Christopher Mayer, and Joseph Tracy

Banking and Finance

The authors use data from credit reports and deed
records to better understand the extent to which
second liens contributed to the housing crisis by
allowing buyers to purchase homes with small
down-payments. Second liens in the form of home
equity lines of credit (HELOCs) were originated to
relatively high-quality borrowers, and originations
were declining near the peak of the housing boom.
By contrast, characteristics of closed-end second liens
(CES) were worse on all these dimensions. Default
rates of second liens are generally similar to that of
the first lien on the same home, although HELOCs
perform better than CES. Finally, the authors show
that delinquency rates on second liens, especially
HELOCs, have not declined as quickly as those on
most other types of credit, raising a potential concern
for lenders with large portfolios of second liens on
their balance sheets.

No. 564, July 2012
The Minimum Balance at Risk: A Proposal
to Mitigate the Systemic Risks Posed
by Money Market Funds
Patrick E. McCabe, Marco Cipriani,
Michael Holscher, and Antoine Martin
This paper introduces a proposal for money market
fund (MMF) reform that could mitigate systemic risks
arising from these funds by protecting shareholders,
such as retail investors, who do not redeem quickly
from distressed funds. The authors’ proposal would
require that a small fraction of each MMF investor’s
recent balances, called the “minimum balance at risk”
(MBR), be demarcated to absorb losses if the fund is
liquidated. Most regular transactions in the fund
would be unaffected, but redemptions of the MBR
would be delayed for thirty days. A key feature of the
proposal is that large redemptions would subordinate

RESEARCH AND STATISTICS GROUP
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Research UPDATE ■ Number 3, 2012
No. 570, September 2012
Pricing TIPS and Treasuries with
Linear Regressions
Michael Abrahams, Tobias Adrian, Richard K. Crump,
and Emanuel Moench

when the intermediation constraint binds. Acquiring the additional information, however, is costly to
the specialists, making them less likely to decrease
their risky asset holdings when the intermediation
constraint binds. Boyarchenko shows that this behavior leads the equity capital constraint to bind more
frequently, making asset prices in the economy more
volatile. She finds empirical evidence consistent with
these predictions.

Abrahams et al. present an affine term structure
model for the joint pricing of Treasury InflationProtected Securities (TIPS) and Treasury yield curves
that adjusts for TIPS’ relative illiquidity. The authors’
estimation using linear regressions is computationally very fast and can accommodate unspanned
factors. The baseline specification with six principal
components extracted from Treasury and TIPS
yields, in combination with a liquidity factor,
generates negligibly small pricing errors for both real
and nominal yields. Model-implied expected inflation
provides a better prediction of actual inflation than
breakeven inflation. The value of the deflation floor
calculated from the model is generally small in
magnitude, but it spiked during the recent crisis.

No. 572, September 2012
Doing Well by Doing Good? Community
Development Venture Capital
Anna Kovner and Josh Lerner
This paper examines the investments and performance of community development venture capital
(CDVC). It finds substantial differences between
CDVC and traditional venture capital (VC) investments: CDVC investments are far more likely to be
in nonmetropolitan regions and in regions with little
prior venture capital activity. Moreover, CDVC is
likely to be in earlier-stage investments and in industries outside the venture capital mainstream that have
lower probabilities of successful exit. Even after the
authors control for this unattractive transaction mix,
the probability of a CDVC investment being successfully exited is lower. One benefit of CDVCs may be
their effect in bringing traditional VC investment to
underserved regions: When Kovner and Lerner control for the presence of traditional VC investments,
each additional CDVC investment results in an
additional 0.06 new traditional VC firm in a region. ■

No. 571, September 2012
Information Acquisition and Financial Intermediation
Nina Boyarchenko
This paper considers the problem of information
acquisition in an intermediated market, where the
specialists have access to superior technology for
acquiring information. The informational advantages
of specialists relative to households lead to disagreement between the two groups, changing the shape
of the intermediation-constrained region of the
economy and increasing the frequency of periods

FEDERAL RESERVE BANK OF NEW YORK
10

www.newyorkfed.org/research

Research and Statistics Group Publications and
Posts: July–September 2012
ECONOMIC POLICY REVIEW,
VOL. 18

No. 565, August 2012
Housing Markets and Residential Segregation:
Impacts of the Michigan School Finance Reform
on Inter- and Intra-District Sorting
Rajashri Chakrabarti and Joydeep Roy

No. 3
Housing Busts and Household Mobility: An Update
Fernando Ferreira, Joseph Gyourko, and
Joseph Tracy

No. 566, August 2012
Mismatch Unemployment
Ayşegül Şahin, Joseph Song, Giorgio Topa, and
Giovanni L. Violante

Key Mechanics of the U.S. Tri-Party Repo Market
Adam Copeland, Darrell Duffie, Antoine Martin,
and Susan McLaughlin

No. 567, August 2012
Intermediary Leverage Cycles and Financial Stability
Tobias Adrian and Nina Boyarchenko

The Federal Reserve’s Term Asset-Backed Securities
Loan Facility
Adam Ashcraft, Allan Malz, and Zoltan Pozsar

No. 568, August 2012
Do Informal Referrals Lead to Better Matches?
Evidence from a Firm’s Employee Referral System
Meta Brown, Elizabeth Setren, and Giorgio Topa

Materials are available at www.newyorkfed.org/
research.

CURRENT ISSUES IN ECONOMICS
AND FINANCE, VOL. 18

No. 569, August 2012
A New Look at Second Liens
Donghoon Lee, Christopher Mayer, and Joseph Tracy

No. 5
Market Declines: What Is Accomplished by
Banning Short-Selling?
Robert Battalio, Hamid Mehran, and Paul Schultz

No. 570, September 2012
Pricing TIPS and Treasuries with Linear Regressions
Michael Abrahams, Tobias Adrian, Richard K. Crump,
and Emanuel Moench

No. 6
The American Recovery and Reinvestment Act of
2009: A Review of Stimulus Spending in New York
and New Jersey
James Orr and John Sporn

No. 571, September 2012
Information Acquisition and Financial Intermediation
Nina Boyarchenko
No. 572, September 2012
Doing Well by Doing Good? Community
Development Venture Capital
Anna Kovner and Josh Lerner

STAFF REPORTS
No. 563, July 2012
Federal Reserve Liquidity Provision during
the Financial Crisis of 2007-2009
Michael J. Fleming

No. 573, September 2012
Abbott and Bacon Districts: Education Finances
during the Great Recession
Rajashri Chakrabarti and Sarah Sutherland

No. 564, July 2012
The Minimum Balance at Risk: A Proposal
to Mitigate the Systemic Risks Posed
by Money Market Funds
Patrick E. McCabe, Marco Cipriani,
Michael Holscher, and Antoine Martin

RESEARCH AND STATISTICS GROUP
11

Research UPDATE ■ Number 3, 2012
July 23
A Principle for Forward-Looking Monitoring
of Financial Intermediation: Follow the Banks!
Nicola Cetorelli

LIBERTY STREET ECONOMICS
BLOG
July 2
CCAR: More than a Stress Test
Beverly Hirtle

Income Evolution at BHCs: How Big BHCs Differ
Adam Copeland

July 6
Historical Echoes: The Creation of
the Contemporary U.S. Mortgage
Megan Cohen

August 6
Intraday Liquidity Flows
Michele Braun, Adam Copeland, Alexa Herlach, and
Radhika Mithal

July 9
Location, Location, and Pacification: The Effect
of Crime Reduction on Residential Property Value
Claudio Frischtak and Benjamin R. Mandel

August 8
The European Debt Crisis and the Dollar
Funding Gap
Jason Miu, Asani Sarkar, and Alexander Tepper

July 11
The Puzzling Pre-FOMC Announcement “Drift”
David Lucca and Emanuel Moench

August 10
Historical Echoes: Zola’s L’Argent: A Portrait of
a Corrupt Financial World
Amy Farber

July 13
Historical Echoes: Whip Inflation Now . . . and Then
Amy Farber

August 13
Good News or Bad on New York City Jobs?
Jason Bram and James Orr

July 16
Introducing a Series on the Evolution of Banks
and Financial Intermediation
Nicola Cetorelli

August 14
Just Released: Going Mobile–Census Bureau
Launches Economic Data App
Robert Rich, Kara Masciangelo, and Mary Tao

July 17
The Rise of the Originate-to-Distribute Model and
the Role of Banks in Financial Intermediation
João Santos

August 15
The Untold Story of Municipal Bond Defaults
Jason Appleson, Eric Parsons, and
Andrew Haughwout

Just Released: Housing Checkup–Has the Market
Finally Bottomed Out?
Joshua Abel, Richard Peach, and Joseph Tracy

August 17
Historical Echoes: Famous Storyteller a Victim
of Bank Mismanagement
Amy Farber

July 18
The Role of Bank Credit Enhancements
in Securitization
Benjamin H. Mandel, Donald Morgan, and
Chenyang Wei

August 20
The Fed’s Emergency Liquidity Facilities during
the Financial Crisis: The CPFF
Tobias Adrian and Ernst Schaumburg
August 22
The Fed’s Emergency Liquidity Facilities during
the Financial Crisis: The PDCF
Tobias Adrian and Ernst Schaumburg

July 19
The Dominant Role of Banks in
Asset Securitization
Nicola Cetorelli and Stavros Peristiani
July 20
Peeling the Onion: A Structural View
of U.S. Bank Holding Companies
Dafna Avraham, Patricia Selvaggi, and James Vickery

FEDERAL RESERVE BANK OF NEW YORK
12

www.newyorkfed.org/research
August 24
Historical Echoes: Not-So-Classical Opera Explains
Interest Rates
Amy Farber

September 19
Soaring Tuitions: Are Public Funding Cuts to Blame?
Rajashri Chakrabarti, Maricar Mabutas, and Basit Zafar
September 21
Historical Echoes: 150 Years after the Morrill Act
Rajashri Chakrabarti, Amy Farber, and Basit Zafar

August 27
Interest on Excess Reserves and Cash “Parked”
at the Fed
Gaetano Antinolfi and Todd Keister

September 24
How Much Can Refinancing Reduce the Risk of
Mortgage Defaults?
Joshua Abel, Joseph Tracy, and Joshua Wright

August 29
Just Released: Has Household Deleveraging Continued?
Andrew Haughwout, Donghoon Lee, Joelle Scally, and
Wilbert van der Klaauw

September 26
Just Released: August Indexes of Coincident
Economic Indicators Show Uneven Growth
across the Region
Jason Bram and James Orr

If Interest Rates Go Negative . . . Or, Be Careful What
You Wish For
Kenneth Garbade and Jamie McAndrews

Rebalancing the Economy in Response to
Fiscal Consolidation
Richard W. Peach

Follow That Money! How Global Banks Manage
Liquidity Globally
Nicola Cetorelli and Linda Goldberg

September 28
Historical Echoes: Policymakers Gone Fishin’–The
Beginnings of the Fed’s Jackson Hole Symposium
Amy Farber

August 31
Historical Echoes: What’s in a Name? The Sveriges
Riksbank Prize in Economic Sciences in Memory
of Alfred Nobel
Amy Farber
September 17
The Odd Behavior of Repo Haircuts during
the Financial Crisis
Adam Copeland and Antoine Martin

The views expressed in the publications, papers, and posts 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
13