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ResearchUPDATE

federalreserve
reservebank
bankof
ofnew
newyork
york■■Number
Number4,3,2011
2009
federal
Research and Statistics Group

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

Research Group Provides New Platforms
for Economists’ Work

I

n 2011, we expanded our efforts to reach
audiences through new media offerings—
including video interviews and a podcast.

Video Interviews
The video interviews are designed to spotlight
research that addresses issues of broad public concern
as well as recent work on topics of particular interest
to the academic and policy communities. They
present the insights of economists and colleagues and
The video interviews are complement articles in our chief
research publications—the Economic
designed to spotlight Policy Review, Current Issues in
research that addresses Economics and Finance, and the Staff
issues of broad public Reports working paper series.

concern as well as
recent work on topics
of particular interest to
the academic and policy
communities.

During the year, we added three
new videos to our author interview
series.

In a video released in February
2011, Michael Fleming and Nicholas
Klagge discuss some findings from
their Current Issues article “Income Effects of Federal
Reserve Liquidity Facilities” (vol. 17, no. 1). The
authors explain how the special lending programs
(liquidity facilities) introduced by the Fed work and
how they generate income, and evaluate the program’s
success in terms of cost savings to both the Federal
Reserve and taxpayers.

In another video, released in November,
Kathryn Chen and Asani Sarkar, coauthors with
Michael Fleming, John Jackson, and Ada Li of the
September 2011 staff report “An Analysis of CDS
Transactions: Implications for Public Reporting,” talk
about their study of credit derivatives, focusing on
credit default swaps (CDS). The authors describe how
they were able to study CDS in such an opaque
market; consider the implications of increased
transparency for CDS market makers, given that
hedging by dealers is quite slow; and clarify the
trade-off between the benefits of increased availability
of information and the potential risk to market
makers. Their study aims to provide a framework for
policymakers to consider when designing public
reporting rules.
In a third video, released in December, Jaison
Abel and Richard Deitz discuss their Current
Issues article “The Role of Colleges and Universities in

Also in this issue…
EPR article sheds light on liquidity of TIPS................3
New study examines differences in how central
banks implement policy...........................................4
Top blog posts of Q4......................................................5
Most downloaded publications....................................6
Papers recently published by Research
Group economists.....................................................6
Papers presented at conferences...................................7
Staff Reports: New titles.................................................8
Publications and blog posts: October-December... 12

Research UPDATE n Number 4, 2011
Podcast
We also released a podcast in which economists James
Orr, John Sporn, Joseph Tracy, and Junfeng Huang
share the key findings of their Current Issues article
“Help for Unemployed Borrowers: Lessons from the
Pennsylvania Homeowners’ Emergency Mortgage
Assistance Program” (vol. 17, no. 2). The team
explains how the approach taken by the Pennsylvania
program differs from federal mortgage assistance
programs, the advantages and cost savings of the
Pennsylvania program, and key lessons for policymakers to consider when making refinements to
mortgage relief programs.
Visit www.newyorkfed.org/research/video_
interviews.html. And keep an eye open in 2012 for
more author interviews and other videos. n

Building Local Human Capital” (vol. 17, no. 6). The
authors explain what human capital is and how
colleges and universities deepen the human capital in
their respective regions—by producing college
graduates who increase the supply of educated
individuals entering the local workforce and by
conducting research activities that will raise the
demand for educated workers by attracting new firms
and helping existing firms to grow. Their research
concludes that policymakers should focus on both
supply- and demand-side objectives.

Follow Us on Twitter!
The Research Group recently launched a Twitter feed, designed to offer the first word
on news going on in the Group, such as:
n new

publications and blog posts,

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updates on economists’ work and speaking engagements,

n

postings of key indexes and data,

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media coverage of our work.

Follow us at @NYFedResearch

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EPR Article Sheds Light on Liquidity of TIPS

T

the nominal securities market, but some unique
features too. In both markets, there is a significant
difference in trading activity between the most
recently issued (“on-the-run”) and previously issued
(“off-the-run”) securities, as trading drops sharply
when securities go off the run. In the TIPS market,
there is little difference in bid-ask spreads or quoted
depth between securities, but large variation in the
incidence of posted quotes.
The expected benefits
These results lead the authors to
from the Treasury’s
conclude that “trading activity
introduction of TIPS
and the incidence of posted
quotes may be better crossin 1997 have not been
sectional measures of TIPS
fully realized, mainly
liquidity than bid-ask spreads or
because the securities are
quoted depth.”
The study also examines
less liquid than nominal
intraday trading patterns and
Treasury securities.
the effects on TIPS liquidity of
public announcements (the CPI release, employment
report, FOMC post-meeting announcement, and
TIPS auction results). Intraday trading patterns are
found to be broadly similar in the TIPS and nominal
markets, but TIPS activity peaks somewhat later—
likely reflecting differences in the use and ownership
of the securities. Announcement effects differ
between markets, with TIPS auction results and CPI
releases eliciting especially strong increases in trading
activity, “likely indicating these announcements’
particular importance to TIPS valuation,” according
to the authors. n

he liquidity of Treasury inflationprotected securities, or TIPS, differs from
that of nominal Treasuries in some
important ways, according to new
evidence presented in “The Microstructure of the
TIPS Market.”
In this forthcoming study in the Economic Policy
Review, Michael J. Fleming and Neel Krishnan
observe that the expected benefits from the Treasury’s
introduction of TIPS in 1997 have not been fully
realized, mainly because the securities are less liquid
than nominal Treasury securities. The relative lack of
liquidity is thought to result in a liquidity premium
on TIPS yields compared with yields on nominal
Treasuries, a factor that offsets the advantages of TIPS
having no inflation risk.
Despite the importance of TIPS liquidity and the
market’s large size—$728 billion in November 2011—
hardly any quantitative evidence exists on the
securities’ liquidity. The authors note that Fed data
show trading activity in TIPS to be much lower than
activity in nominal securities. But the data are
aggregated over the week and across all TIPS and
cover only trading volume, so they do not provide
information on activity in particular TIPS, activity
over the day or week, or other measures of liquidity,
like bid-ask spreads.
In contrast, Fleming and Krishnan analyze more
granular, “tick” data from the interdealer market to
characterize the liquidity of the TIPS market. They
identify several features of that market also present in

RESEARCH AND STATISTICS GROUP
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Research UPDATE n Number 4, 2011

New Study Examines Differences in How Central
Banks Implement Policy

C

entral banks differ in their approaches to
implementing monetary policy, both in
good economic times and in bad. In a
recent article in Current Issues in
Economics and Finance (vol. 17, no. 7, “Monetary
Policy Implementation: Common Goals but
Different Practices”), Marlene Amstad and Antoine
Martin consider the strategies followed by four
central banks—the Federal Reserve, the European
Central Bank, the Bank of England, and the Swiss
National Bank—to influence the availability of
money and credit when the economy is stable and
when a crisis occurs.
The authors look first at how the four banks
approach the choice of an interest rate target, or
“operational target,” a standard feature of conventional
monetary policy. While the Federal Reserve, the
European Central Bank, and the Bank of England
target an overnight rate, the Swiss central bank targets
a range for the three-month Libor for the Swiss franc.
The authors note that the choice between a short-term
and longer-term rate presents trade-offs: the former is
easier to target, but the latter is more relevant to
economic activity, since it more directly influences
firms’ investment decisions and households’ real estate
decisions. Moreover, during periods of financial
stress, the use of the three-month rate permits a
central bank to stabilize the long-term rate while
letting shorter rates fluctuate to absorb changes in risk
or liquidity premia.

In the second half of their analysis, Amstad and
Martin consider how the four central banks have
chosen to manage the expanded balance sheets they
acquired during the financial crisis as a result of
unconventional monetary policy actions. Specifically,
the discussion centers on the choice of particular
instruments that allow the
The choice between a
banks to adjust interest rates
short-term and longerwithout regard to the quantity
term rate presents
of reserves on their balance
sheets. As the authors explain, trade-offs: the former is
the four central banks have
easier to target, but the
adopted different combinations
latter is more relevant to
of three instruments: the
payment of interest on excess
economic activity, since it
reserves at the policy rate, the
more directly influences
issuance of central bank bills,
firms’ investment
and the use of reverse repurdecisions and households’
chase agreements.
Amstad and Martin
real estate decisions.
observe that the central banks’
different approaches to balance sheet management
may in part reflect “the unique institutional setting in
which each one operates.” They caution that it is too
early to tell what the outcome of the individual
banks’ choices will be, but suggest that an “awareness
of the . . . instruments and strategies that are possible”
can inform policymakers’ efforts to guide the
economy under both normal and crisis conditions. n

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Top Blog Posts of Q4

O

ur Liberty Street Economics blog posts
on economic topics twice a week—
more frequently when there’s a post
on a newly released report or on a
pressing topic.
Listed below are the top five posts in the
fourth quarter.
■

■

Abel and Deitz show that in the United States,
the wage gap between high- and low-paid occupations has widened over the past three decades, and
that the share of jobs in both high- and low-paying
occupations has grown, leaving a shrinking middle.

“‘Flip This House’: Investor Speculation and the
Housing Bubble,” by Andrew Haughwout,
­Donghoon Lee, Joseph Tracy, and Wilbert van der
Klaauw, December 5 – 9,020 views

■

The authors present new findings from their
recent New York Fed study that uses unique data to
suggest that real estate “investors”—borrowers who
use financial leverage in the form of mortgage
credit to purchase multiple residential properties—
played a previously unrecognized, but very
­important, role in the housing bubble.
■

“Job Polarization in the United States: A Widening
Gap and Shrinking Middle,” by Jaison R. Abel and
Richard Deitz, November 21 – 4,849 views

“How Well Do Financial Markets Separate News
from Noise? Evidence from an Internet Blooper,” by
Carlos Carvalho, Nicholas Klagge, and Emanuel
Moench, October 5 – 4,495 views
This post examines an unusual episode
involving a false news report that provides a unique
look into how financial markets process news of
unexpected events.

■

“The Failure to Forecast the Great Recession,” by
Simon Potter, November 25 – 8,808 views

“Why Is There a ‘Zero Lower Bound’ on Interest
Rates?” by Todd Keister, November 16 – 3,571 views
Economists often talk about nominal interest
rates having a “zero lower bound,” meaning they
should not be expected to fall below zero. Keister
explains why negative interest rates are possible in
principle, but rare in practice.

Potter examines the performance of the
forecasts produced by Federal Reserve Bank of New
York staff over the 2007-10 period and considers
reasons why the Fed, like most private sector
forecasters, failed to predict the Great Recession.

http://libertystreeteconomics.newyorkfed.org

New Publications
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The Research Group of the Federal Reserve Bank of New York, 2011-12: An online guide for economists
interested in joining the Group as well as an overview of our staff, structure, and research departments.
www.newyorkfed.org/research/research_group/index.html

n

Publications and Other Research, 2011: An annual catalogue of our publications, papers, and blog posts.
www.newyorkfed.org/research/publication_annuals/publications_otherresearch.html

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Research UPDATE n Number 4, 2011

Most Downloaded Publications

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SSRN website, fourth-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).

■

New York Fed website, fourth-quarter 2011:
■

■

■

■

“Why Are Banks Holding So Many Excess Reserves?”
by Todd Keister and James McAndrews (Staff
Reports, no. 380, July 2009) – 4,543 downloads
“Understanding the Securitization of Subprime
Mortgage Credit,” by Adam B. Ashcraft and
Til Schuermann (Staff Reports, no. 318,
March 2008) – 4,398 downloads

■

“Determinants and Impact of Sovereign Credit
Ratings,” by Richard Cantor and Frank Packer
(Economic Policy Review, vol. 2, no. 2,
October 1996) – 205 downloads
“Understanding the Securitization of Subprime
Mortgage Credit,” by Adam B. Ashcraft and
Til Schuermann (Staff Reports, no. 318,
March 2008) – 203 downloads
“The Corporate Governance of Banks,” by
Jonathan R. Macey and Maureen O’Hara
(Economic Policy Review, vol. 9, no. 1,
April 2003) – 169 downloads

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

“Central Bank Dollar Swap Lines and Overseas
Dollar Funding Costs,” by Linda Goldberg, Craig
Kennedy, and Jason Miu (Economic Policy Review,
vol. 17, no. 1, May 2011) – 3,441 downloads

Recently Published
Tobias Adrian. 2011. “Financial Intermediary Balance
Sheet Management,” with Hyun Song Shin. Annual
Review of Financial Economics 3, December: 289-307.

Andreas Fuster. 2011. “Insuring Consumption Using
Income-Linked Assets,” with Paul Willen. Review of
Finance 15, no. 4 (October): 835-73.

Gara Afonso. 2011. “Precautionary Demand and
Liquidity in Payment Systems,” with Hyun Song Shin.
Journal of Money, Credit, and Banking 43, no. s2
(October): 589-619.

Todd Keister. 2011. Comment on “Banking in a
Matching Model of Money and Capital,” by Valerie R.
Bencivenga and Gabriele Camera. Journal of Money,
Credit, and Banking 43, no. s2 (October): 477-85.

Mary Amiti. 2011. “Exports and Financial Shocks,”
with David E. Weinstein. Quarterly Journal of
Economics 126, no. 4 (November): 1841-77.

James McAndrews and David Skeie. 2011.
“Precautionary Reserves and the Interbank Market,”
with Adam Ashcraft. Journal of Money, Credit,
and Banking 43, no. s2 (October): 311-48.

Gauti Eggertsson. 2011. Comment on “Price-Level
Targeting and Stabilization Policy,” by Aleksander
Berentsen and Christopher Waller. Journal of Money,
Credit, and Banking 43, no. s2 (October): 581-8.

Giorgio Topa and Wilbert van der Klaauw. 2011.
“Expectations of Inflation: The Biasing Effect of
Thoughts about Specific Prices,” with Wändi Bruine
de Bruin. Journal of Economic Psychology 32, no. 5
(October): 834-45. n

Andreas Fuster. 2011. “Expectations as Endorsements:
Evidence on Reference-Dependent Preferences from
Exchange and Valuation Experiments,” with Keith M.
Marzilli Ericson. Quarterly Journal of Economics 126,
no. 4 (November): 1879-907.
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Papers Presented
“Incentives and Responses under No Child Left
Behind: Credible Threats and the Role of Competition,” Rajashri Chakrabarti. Association for Public
Policy Analysis and Management conference,
Washington, D.C., November 5. Also presented at the
Fall NBER Education workshop, Stanford University,
Palo Alto, California, November 10.

International Business School seminar, Waltham,
Massachusetts, November 18. With Cédric Tille.
“Real-Time Inflation Forecasting in a Changing
World,” Jan Groen. Marcel-Dagenais Seminar on
Econometrics and Macroeconomics, University of
Montreal, Montreal, Quebec, Canada, November 3.
With Richard Paap and Francesco Ravazzolo.

“Merit Aid, Student Mobility, and the Role of College
Selectivity,” Rajashri Chakrabarti. Association for
Public Policy Analysis and Management conference,
Washington, D.C., November 4. With Joydeep Roy.

“The Pre-FOMC Announcement Drift,” Emanuel
Moench. New York University Stern School of
Business seminar, New York City, November 30.
With David Lucca.

“Macro Effects of Large Asset Purchases,” Vasco
Cúrdia. University of California at Santa Cruz, Santa
Cruz, California, November 10. With Han Chen and
Andrea Ferrero. Also presented at a Bank of England
seminar, London, England, November 18.

“Macro Forecasts, Uncertainty, and Tail Risk Assessments: Evidence from the ECB Survey of Professional
Forecasters,” Robert Rich. CESifo (Center for Economic Studies, Ifo Institute, and Munich Society for
the Promotion of Economic Research) Conference on
Macroeconomics and Survey Data, Munich, Germany,
November 11. With Joseph Song and Joseph Tracy.
Also presented at a Fordham University Department
of Economics seminar, New York City, November 29.

“Rare Shocks, Great Recessions,” Marco Del Negro.
European Seminar on Bayesian Econometrics, National
Bank of Belgium, Brussels, Belgium, November 4.
With Vasco Cúrdia and Daniel Greenwald.

“Repo Runs,” David Skeie. Baruch College seminar,
New York City, October 12. With Antoine Martin,
David Skeie, and Ernst-Ludwig von Thadden.

“Anxiety in the Face of Risk,” Thomas Eisenbach.
Miami Behavioral Finance conference, University
of Miami School of Business Administration, Coral
Gables, Florida, December 16. With Martin Schmalz.

“Anatomy of Welfare Reform: Announcement and
Implementation Effects,” Wilbert van der Klaauw.
IZA Conference on Labor Market Policy Evaluation,
Harvard University, Cambridge, Massachusetts,
October 8. With Richard Blundell and Marco
Francesconi. Also presented at a New York University
Wagner Graduate School of Public Service seminar,
New York City, October 20.

“In Defense of Global Banking,” Linda Goldberg.
Keynote address at the Deutsche Bundesbank
Conference on the Costs and Benefits of Global
Banking, Frankfurt, Germany, October 18.
“The International Role of the Dollar and the Transmission of Shocks through Global Banks,” Linda
Goldberg. Bank of England Monetary Policy Event on
Exchange Rates and Capital Flows, London, England,
October 25.

“Is Libor Accurate? Evidence from Term Funding
Markets,” James Vickery. University of California at
Berkeley Haas School of Business, Fisher Center
for Real Estate and Urban Economics seminar,
Berkeley, California, November 30. With Dennis Kuo
and David Skeie.

“Liquidity Management of U.S. Global Banks: Internal
Capital Markets in the Great Recession,” Linda
Goldberg. Deutsche Bundesbank Conference on
“Basel III and Beyond: Regulating and Supervising
Banks in the Post-Crisis Era,” Frankfurt, Germany,
October 19. With Nicola Cetorelli.

“Stereotypes and Madrassas: Experimental Evidence
from Pakistan,” Basit Zafar. NBER Workshop on
Economics of Culture and Institutions, Boston,
Massa­­chusetts, November 12. With Adeline Delavande. n

“Micro, Macro, and Strategic Forces in International
Trade Invoicing,” Linda Goldberg. Brandeis University

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Research UPDATE n Number 4, 2011

New Titles in the Staff Reports Series
Macroeconomics and Growth

No. 521, October 2011
Early Contract Renegotiation: An Analysis
of U.S. Labor Contracts from 1970 to 1995
Robert Rich and Joseph Tracy

No. 519, October 2011
Expectations versus Fundamentals: Does the Cause
of Banking Panics Matter for Prudential Policy?
Todd Keister and Vijay Narasiman

This paper examines the ex post flexibility of U.S.
labor contracts during the 1970-95 period by investigating whether unanticipated changes in inflation
increase the likelihood of a contract being renegotiated prior to its expiration. Rich and Tracy find strong
empirical support for this hypothesis. Specifically,
their results indicate that renegotiations are triggered
principally by large and infrequent price shocks of
either sign. When combined with evidence that
ex ante contract durations are shorter during episodes
of increased inflation uncertainty, their results suggest
that these contracts are flexible both ex ante and
ex post to changes in the evolution of inflation.

There is a longstanding debate about whether banking
panics and other financial crises always have fundamental causes or are sometimes the result of selffulfilling beliefs. Disagreement on this point would
seem to present a serious obstacle to designing
policies that promote financial stability. However,
Keister and Narasiman show that the appropriate
choice of policy is invariant to the underlying cause of
banking panics in some situations. In their model, the
anticipation of being bailed out in the event of a crisis
distorts the incentives of financial institutions and
their investors. Two policies that aim to correct this
distortion are compared: restricting policymakers
from engaging in bailouts, and allowing bailouts but
taxing the short-term liabilities of financial institutions. The authors find that the latter policy yields
higher equilibrium welfare regardless of whether
panics are sometimes caused by self-fulfilling beliefs.

No. 524, November 2011
Optimal Disinflation under Learning
Timothy Cogley, Christian Matthes, and
Argia M. Sbordone
Cogley, Matthes, and Sbordone model transitional
dynamics that emerge after the adoption of a new
monetary policy rule. They assume that private agents
learn about the new policy via Bayesian updating, and
they study how learning affects the nature of the
transition and the choice of a new rule. Temporarily
explosive dynamics can emerge when there is
substantial disagreement between actual and perceived policies. These dynamics make the transition
highly volatile and dominate expected loss. The
emergence of temporarily explosive paths depends
more on uncertainty about policy-feedback
parameters than about the long-run inflation target.
For that reason, the central bank can at least achieve
low average inflation. Its ability to move feedback
parameters away from initial beliefs, however, is
more constrained.

No. 520, October 2011
The Great Escape? A Quantitative Evaluation
of the Fed’s Liquidity Facilities
Marco Del Negro, Gauti Eggertsson, Andrea Ferrero,
and Nobuhiro Kiyotaki
The authors introduce liquidity frictions into an
otherwise standard DSGE model with nominal and
real rigidities, explicitly incorporating the zero bound
on the short-term nominal interest rate. Within this
framework, they ask: Can a shock to the liquidity of
private paper lead to a collapse in short-term nominal
interest rates and a recession like the one associated
with the 2008 U.S. financial crisis? Once the nominal
interest rate reaches the zero bound, what are the
effects of interventions in which the government
exchanges liquid government assets for illiquid
private paper? The authors find that the effects of
the liquidity shock can be large, and they provide
numerical examples showing that the liquidity
facilities prevented a repeat of the Great Depression
in 2008-09.

No. 527, December 2011
The Macroeconomic Effects of Large-Scale Asset
Purchase Programs
Han Chen, Vasco Cúrdia, and Andrea Ferrero
The effects of asset purchase programs on macroeconomic variables are likely to be moderate. The
authors embed a preferred habitat framework in a
standard DSGE model estimated on U.S. data and

RESEARCH AND STATISTICS GROUP

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International

evaluate the effects of the Federal Reserve’s second
large-scale asset purchase program (LSAP II). The
simulations suggest that such a program increases
GDP growth by less than half a percentage point,
although the effect on the level of GDP is very
persistent. The program’s marginal contribution to
inflation is minimal. The small estimated degree of
financial market segmentation is crucial for the
results. Augmenting the set of observables with a
measure of long-term debt leads to even smaller
macroeconomic effects of LSAP programs, as the
authors find an elasticity of the risk premium to the
quantity of debt substantially smaller than the recent
empirical estimates suggest. Throughout the analysis,
a commitment to an extended period at the zero
lower bound for nominal interest rates increases the
effects of asset purchase programs on GDP growth
and inflation.

No. 522, October 2011
The International Role of the Dollar: Does It Matter
if This Changes?
Linda Goldberg
There is often speculation that the international roles
of currencies may be changing. This paper presents
the current status of these roles. The U.S. dollar
continues to be the dominant currency across various
uses. Yet, such a role may change over time. If this
occurs, there could be consequences for seignorage
returns, U.S. funding costs, the dollar’s value, U.S.
insulation from foreign shocks, and U.S. global
influence. The paper concludes with a discussion of
recent research on related themes and questions for
future study.
No. 530, December 2011
What Do Drug Monopolies Cost Consumers in
Developing Countries?
Rebecca Hellerstein

No. 531, December 2011
Some Unpleasant General Equilibrium
Implications of Executive Incentive
Compensation Contracts
John B. Donaldson, Natalia Gershun, and
Marc P. Giannoni

Hellerstein quantifies the effects of drug monopolies
and low per-capita income on pharmaceutical prices
in developing economies using the example of the
antiretroviral drugs used to treat HIV.

The authors consider a simple variant of the standard
real business cycle model in which shareholders hire a
self-interested executive to manage the firm on their
behalf. A generic family of compensation contracts
similar to those employed in practice is studied.
When compensation is convex in the firm’s own
dividend (or share price), a given increase in the firm’s
output generated by an additional unit of physical
investment results in a more than proportional
increase in the manager’s income. Incentive contracts
of sufficient yet modest convexity are shown to result
in an indeterminate general equilibrium, one in
which business cycles are driven by self-fulfilling
fluctuations in the manager’s expectations that are
unrelated to the economy’s fundamentals. Arbitrarily
large fluctuations in macroeconomic variables may
result. The authors also provide a theoretical justification for the proposed family of contracts by demonstrating that they yield first-best outcomes for specific
parameter choices.

Microeconomics
No. 523, October 2011
Do We Know What We Owe? A Comparison of
Borrower- and Lender-Reported Consumer Debt
Meta Brown, Andrew Haughwout, Donghoon Lee, and
Wilbert van der Klaauw
Brown et al. compare household debt as reported by
borrowers to the Survey of Consumer Finances (SCF)
with household debt as reported by lenders to Equifax
using the new FRBNY Consumer Credit Panel (CCP).
Moments of the borrower and lender debt distributions are compared by year, age of household head,
household size, and region of the country, in total and
across five standard debt categories. The debt reports
are strikingly similar, with one noteworthy exception:
the aggregate credit card debt implied by SCF
borrowers’ reports is less than 50 percent of the
aggregate credit card debt implied by CCP lenders’
reports. Adjustments for sample representativeness
and for small business and convenience uses of credit
cards raise SCF credit card debt to somewhere

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Research UPDATE n Number 4, 2011
between 52 and 66 percent of the CCP figure. Despite
the credit card debt mismatch, bankruptcy history is
reported comparably in the borrower and lender
sources, indicating that not all stigmatized consumer
behaviors are underreported.

corroborate their previous results: Negative equity
reduces household mobility by 30 percent, and $1,000
of additional mortgage or property tax costs reduces
household mobility by 10 to 16 percent. SchulhoferWohl’s finding of a slight positive correlation between
mobility and negative equity appears to be due to a
large fraction of false positives, as his coding methodology has the propensity to misclassify almost half of
the additional moves it identifies relative to the
authors’ measure of permanent moves. This also
makes his mobility measure dynamically inconsistent,
as many transitions originally classified as a move are
reclassified as a nonmove when additional AHS
panels become available. The authors conclude with
directions for future research, including potential
improvements to measures of household mobility.

No. 525, October 2011
Incentives and Responses under No Child
Left Behind: Credible Threats and the Role
of Competition
Rajashri Chakrabarti
The No Child Left Behind law mandated the institution of adequate yearly progress (AYP) objectives, on
which schools are assigned a pass or fail. Chakrabarti
studies the incentives and responses of schools that
failed AYP once. Using regression discontinuity
designs, she finds evidence in these schools of
improvements in high-stakes reading and spillover
effects to low-stakes language arts. The patterns are
consistent with a focus on marginal students around
the high-stakes cutoff, but this improvement did not
come at the expense of the ends. Meanwhile, there is
little evidence of improvement in high-stakes math or
in low-stakes science and social studies. Performance
in low-stakes grades suffered, as did performance in
weaker subgroups despite their inclusion in AYP
computations. Finally, there is strong evidence in
favor of response to incentives: Schools that failed
AYP only in reading and/or math subsequently did
substantially better in those subject areas. Credibility
of threat mattered. AYP-failed schools that faced more
competition responded both more strongly and more
broadly.

No. 534, December 2011
The Impact of the Great Recession on School
District Finances: Evidence from New York
Rajashri Chakrabarti and Elizabeth Setren
Despite education’s fundamental role in human
capital formation and growth, there is no research
that examines the effect of the Great Recession (or
any other recession) on schools. This study begins to
fill this gap. Exploiting detailed data on school finance
indicators and an analysis of trend shifts, the authors
examine how the Great Recession affected school
funding in New York State. While they find no
evidence of effects on either total revenue or expenditure, they identify important compositional changes
to both. There is strong evidence of substitution of
funds on the revenue side—the infusion of funds
from the federal stimulus occurred simultaneously
with statistically and economically significant cuts in
state and local financing, especially the former. On
the expenditure side, instructional expenditure was
maintained, while other categories, such as transportation, student activities, and utilities, suffered.
Important heterogeneities in experiences are also
observed by poverty level, metropolitan area, school
district size, and urban status. These findings promise
to facilitate an understanding of how recessions affect
schools and of the role policy can play in mitigating
the consequences.

No. 526, November 2011
Housing Busts and Household Mobility:
An Update
Fernando Ferreira, Joseph Gyourko, and Joseph Tracy
This paper provides updated estimates of the impact
of three financial frictions—negative equity, mortgage
lock-in, and property tax lock-in—on household
mobility. The authors add the 2009 wave of the
American Housing Survey (AHS) to their sample and
also create an improved measure of permanent moves
in response to Schulhofer-Wohl’s (2011) critique of
their earlier work (2010). The updated estimates

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

Banking and Finance

No. 532, December 2011
Financial Intermediary Balance Sheet
Management
Tobias Adrian and Hyun Song Shin

No. 528, December 2011
Which Financial Frictions? Parsing the Evidence
from the Financial Crisis of 2007-09
Tobias Adrian, Paolo Colla, and Hyun Song Shin

Conventional discussions of balance sheet management by nonfinancial firms take the set of positive
net present value (NPV) projects as given, which in
turn determines the size of the firm’s assets. The
focus is on the composition of equity and debt in
funding such assets. In contrast, the balance sheet
management of financial intermediaries reveals that
it is equity that behaves like the predetermined
variable, and the asset size of the bank or financial
intermediary is determined by the degree of leverage
that is permitted by market conditions. The relative
stickiness of equity reveals possible nonpecuniary
benefits to bank owners so that they are reluctant to
raise new equity, even during boom periods when
raising equity is associated with less stigma and,
hence, smaller discounts. The authors explore the
empirical evidence for both market-based financial
intermediaries such as the Wall Street investment
banks, as well as the commercial bank subsidiaries of
the large U.S. bank holding companies. They further
explore the aggregate consequences of such behavior
by the banking sector for the propagation of the
financial cycle and securitization.

The financial crisis of 2007-09 has sparked keen
interest in models of financial frictions and their
impact on macro activity. Most models share the
feature that borrowers suffer a contraction in the
quantity of credit. However, the evidence suggests
that although bank lending contracted during the
crisis, bond financing actually increased to make up
much of the gap. This paper reviews both aggregate
and micro-level data and highlights the shift in the
composition of credit between loans and bonds.
Motivated by the evidence, the authors formulate a
model of direct and intermediated credit that captures
the key stylized facts. In their model, the impact on
real activity comes from the spike in risk premiums
rather than the contraction in the total quantity
of credit.
No. 529, December 2011
Repo and Securities Lending
Tobias Adrian, Brian Begalle, Adam Copeland, and
Antoine Martin,
The authors provide an overview of the data requirements necessary to monitor repurchase agreements
(repos) and securities lending markets for the
purposes of informing policymakers and researchers
about firm-level and systemic risk. They start by
explaining the functioning of these markets, then
argue that it is crucial to understand the institutional
arrangements. Data collection is currently incomplete. A comprehensive collection should include six
characteristics of repo and securities lending trades at
the firm level: principal amount, interest rate,
collateral type, haircut, tenor, and counterparty.

No. 533, December 2011

Dodd-Frank One Year On: Implications
for Shadow Banking

Tobias Adrian

One year after passage of the Dodd-Frank Act (DFA),
regulators proposed several of the rules required for
its implementation. In this paper, Adrian discusses
some aspects of proposed DFA rules in light of
shadow banking. The topics are risk-retention rules
for securitized products and the impact of capital
reforms on asset-backed commercial paper (ABCP)
conduits. While the reform of securitization is
resulting primarily from DFA, changes in accounting
standards, together with the Basel capital reforms,
have had important impacts on the economics of
ABCP conduits. n

RESEARCH AND STATISTICS GROUP
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Research UPDATE n Number 4, 2011

Research and Statistics Group
Publications and Papers: October–December 2011
No. 523, October 2011
Do We Know What We Owe? A Comparison of
Borrower- and Lender-Reported Consumer Debt
Meta Brown, Andrew Haughwout, Donghoon Lee, and
Wilbert van der Klaauw

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

No. 524, November 2011
Optimal Disinflation under Learning
Timothy Cogley, Christian Matthes, and
Argia M. Sbordone

The Microstructure of the TIPS Market
Michael J. Fleming and Neel Krishnan

No. 525, November 2011
Incentives and Responses under No Child
Left Behind: Credible Threats and the Role
of Competition
Rajashri Chakrabarti

Current Issues in Economics
and Finance, Vol. 17

No. 526, November 2011
Housing Busts and Household Mobility:
An Update
Fernando Ferreira, Joseph Gyourko, and Joseph Tracy

No. 6
The Role of Colleges and Universities in Building
Local Human Capital
Jaison R. Abel and Richard Deitz

No. 527, December 2011
The Macroeconomic Effects of Large-Scale Asset
Purchase Programs
Han Chen, Vasco Cúrdia, and Andrea Ferrero

No. 7
Monetary Policy Implementation: Common Goals
but Different Practices
Marlene Amstad and Antoine Martin

No. 528, December 2011
Which Financial Frictions? Parsing the Evidence
from the Financial Crisis of 2007-09
Tobias Adrian, Paolo Colla, and Hyun Song Shin

Staff Reports
No. 519, October 2011
Expectations versus Fundamentals: Does the Cause
of Banking Panics Matter for Prudential Policy?
Todd Keister and Vijay Narasiman

No. 529, December 2011
Repo and Securities Lending
Tobias Adrian, Brian Begalle, Adam Copeland, and
Antoine Martin

No. 520, October 2011
The Great Escape? A Quantitative Evaluation
of the Fed’s Liquidity Facilities
Marco Del Negro, Gauti Eggertsson, Andrea Ferrero,
and Nobuhiro Kiyotaki

No. 530, December 2011
What Do Drug Monopolies Cost Consumers in
Developing Countries?
Rebecca Hellerstein

No. 521, October 2011
Early Contract Renegotiation: An Analysis
of U.S. Labor Contracts from 1970 to 1995
Robert Rich and Joseph Tracy

No. 531, December 2011
Some Unpleasant General Equilibrium
Implications of Executive Incentive
Compensation Contracts
John B. Donaldson, Natalia Gershun, and
Marc P. Giannoni

No. 522, October 2011
The International Role of the Dollar: Does It Matter
if This Changes?
Linda Goldberg
federal reserve bank of new york
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www.newyorkfed.org/research
No. 532, December 2011
Financial Intermediary Balance Sheet
Management
Tobias Adrian and Hyun Song Shin

October 19
Sizing Up the Fed’s Maturity Extension Program
Katherine Femia, Jeff Huther, and Andrea Tambalotti
October 20
Just Released: Fed Proposes Simpler Rules for
Banks’ Reserve Requirements
Richard Roberts

No. 533, December 2011
Dodd-Frank One Year On: Implications
for Shadow Banking
Tobias Adrian

October 21
Historical Echoes: Picturing a Century of Public
Debt Burdens
New York Fed Research Library

No. 534, December 2011
The Impact of the Great Recession on School
District Finances: Evidence from New York
Rajashri Chakrabarti and Elizabeth Setren

Liberty Street Economics
Blog

October 24
Using Crisis Losses to Calibrate a Regulatory
Capital Buffer
Beverly Hirtle

October 3
What If the U.S. Dollar’s Global Role Changed?
Linda Goldberg, Mark Choi, and Hunter Clark

November 7
Remaining Risks in the Tri-Party Repo Market
Antoine Martin

October 5
How Well Do Financial Markets Separate News
from Noise? Evidence from an Internet Blooper
Carlos Carvalho, Nicholas Klagge, and Emanuel Moench

November 8
Just Released: Conference on Global Systemic Risk
Explores Four Key Questions
Tobias Adrian and Michael Abrahams

October 7
Historical Echoes: When Virtual Money Saved
the Day
New York Fed Research Library

November 9
The Debt Ceiling as a “Fiscal Rule”
Richard W. Peach
November 14
The Evolution of Federal Debt Ceilings
Kenneth Garbade

October 11
Did the Fed’s Term Auction Facility Work?
James McAndrews, Asani Sarkar, and Zhenyu Wang

November 16
Why Is There a “Zero Lower Bound”
on Interest Rates?
Todd Keister

October 12
Short-Term Debt, Rollover Risk, and
Financial Crises
Tanju Yorulmazer

November 18
Historical Echoes: What Makes a Bank Look Like
a Bank?
New York Fed Research Library

October 14
Historical Echoes: The 1960s View
of Modern Banking
New York Fed Research Library

November 21
Job Polarization in the United States: A Widening
Gap and Shrinking Middle
Jaison R. Abel and Richard Deitz

October 17
Back to the Future: Revisiting the European Crisis
Paolo Pesenti
October 18
Just Released: Money and Payments Workshop
Examines Repo Market Reform
Gara Afonso and Antoine Martin

RESEARCH AND STATISTICS GROUP
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Research UPDATE n Number 4, 2011
November 23
How Might Increased Transparency Affect
the CDS Market?
Kathryn Chen, Michael Fleming, John Jackson, Ada Li,
and Asani Sarkar

December 5
“Flip This House”: Investor Speculation and
the Housing Bubble
Andrew Haughwout, Donghoon Lee, Joseph Tracy, and
Wilbert van der Klaauw

November 25
The Failure to Forecast the Great Recession
Simon Potter

December 19
When Do Trading Frictions Increase Liquidity?
Gara Afonso

November 28
Unintended Consequences in School
Accountability Policies
Rajashri Chakrabarti and Noah Schwartz

December 21
Central Bank Imbalances in the Euro Area
Matthew Higgins and Thomas Klitgaard

The Liberty Street Economics Blog: An Update
on Our Experience
James McAndrews and Simon Potter

December 23
Historical Echoes: Winning Essay on Central
Banking Gets $100 (in 1910)
New York Fed Research Library

November 30
Designing Executive Compensation to Curb Bank
Risk Taking
Hamid Mehran

December 28
Labor Force Exits Are Complicating
Unemployment Rate Forecasts
Richard Peach, Josiah Bethards, and Joseph Song

December 2
Historical Echoes: Old-Timey Films on
the 1940 Censuses
New York Fed Research Library

December 30
Historical Echoes: Using Art and Artifacts to
Understand the Impact of the Great Depression
New York Fed Research Library

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.
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