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ResearchUPDATE
www.newyorkfed.org/research

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

Liberty Street Economics Blog Series Examines
the Costs of Superstorm Sandy

ecently, New York Fed economists
published a series of posts on the effects
of superstorm Sandy on the New York–
New Jersey–Connecticut region.
The bloggers examined the direct and indirect costs
of the storm as well as the economic consequences
of these costs in detail.
In “What Are the Costs of Superstorm Sandy?”
Jaison Abel, Jason Bram, Richard Deitz, and James
Orr outline the differences between the storm’s direct
costs, such as those associated with the destruction of
buildings, automobiles, bridges, and roads, and its
indirect costs, related to the loss of economic activity
caused by disruptions to the region’s infrastructure.
They also discuss what these cost measures typically
neglect to include—such as disruptions to everyday
life (for example, time spent waiting in line for
gasoline, longer and more arduous commutes to
work, and discarded perishable food). Because of
such omissions, the true costs of natural disasters are
difficult to capture and may be understated.
Next, the bloggers further examine the indirect
costs of the storm in “The Welfare Costs of Superstorm Sandy.” They address an important type of
disaster-related economic loss that often is not
estimated or discussed in policymaking decisions: the
deterioration in quality of life. The post focuses on
how Sandy (and other such disasters) can have
widespread adverse effects on quality of life, and
illustrates how one can try to put an approximate
dollar value on these effects.
In the third post of the series, “The Impact of
Superstorm Sandy on New York City School Closures

and Attendance,” Rajashri Chakrabarti and Max
Livingston analyze the storm’s effect on the city’s
schools and, in particular, on students’ educational
outcomes. Widespread power outages and transportation challenges left New York City little choice but
to close all schools the first week after the storm.
However, schools damaged by the storm remained
closed, with their students relocated elsewhere. The
bloggers note that the loss of school days has negative
effects on student learning and performance, and that
overcrowding of schools hosting displaced students,
long commutes to these host schools, and the
additional efforts required of staff pose major obstacles.
Moreover, psychological impacts are likely to be faced
by all students, especially those in hard-hit areas.
Having assessed the direct and indirect costs of
the storm in detail, Abel et al. then consider who will
ultimately pay the economic costs imposed by the
storm. “How Will We Pay for Superstorm Sandy?”
finds that the federal government and private
insurance companies will likely more than cover the
aggregate costs. However, state and local governments

Also in this issue…
Manhattan home prices are out of line
with rents, study finds�������������������������������������������3
Top blog posts of Q4��������������������������������������������������4
Most downloaded publications��������������������������������5
Papers recently published by Research Group
economists�������������������������������������������������������������5
Papers presented at conferences�������������������������������6
Staff Reports: New titles���������������������������������������������8
Publications and posts: October–December������� 12

Research UPDATE n Number 4, 2012
The Superstorm Sandy series:

in the affected areas typically fund a significant
amount of the relief effort up front, and delays in
reimbursement can create short-term fiscal strain on
these municipalities, especially small ones. Individuals
and businesses may also face financial challenges as
they await reimbursement.
Finally, in “The Path of Economic Recovery from
Superstorm Sandy,” Abel and his co-bloggers look at
regional employment patterns following four past
disasters—Hurricanes Andrew and Katrina, the 9/11
attack on the World Trade Center, and the earthquake
in Northridge, California—to assess how the recovery
from Sandy might play out. They observe that these
events generally suggest that any employment
declines resulting from the storm are likely to be
reversed fairly quickly, and that a permanent loss of
jobs in the region, while possible, is not likely.

“What Are the Costs of Superstorm Sandy?” by
Jaison Abel, Jason Bram, Richard Deitz, and James Orr
“The Welfare Costs of Superstorm Sandy,” by Jaison
Abel, Jason Bram, Richard Deitz, and James Orr
“The Impact of Superstorm Sandy on New York
City School Closures and Attendance,” by Rajashri
Chakrabarti and Max Livingston
“How Will We Pay for Superstorm Sandy?” by
Jaison Abel, Jason Bram, Richard Deitz,
and James Orr
“The Path of Economic Recovery from Superstorm
Sandy,” by Jaison Abel, Jason Bram, Richard Deitz,
and James Orr n

Research Group Publications and Other Media
Economic Policy Review—a policy-oriented journal focusing on economic and financial
market issues.

n The

n EPR

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

n Current
n Second

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

District Highlights—a regional supplement to Current Issues.

n Staff

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

n Publications

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

n 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.

n Liberty

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

federal reserve bank of new york
2

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Manhattan Home Prices Are Out of Line
with Rents, Study Finds

ratio began a fairly
steady rise that continued through 2007. With
the onset of the most
recent recession, rents
turned downward, but
prices continued to
increase, lifting the
price-rent ratio to record
highs. Bram views these
trends as evidence that
Renting offers better financial
rents respond rapidly to
“value” than buying, says Bram
cyclical changes in the
economy, while price
movements follow with a lag of up to two years.
“This pattern is consistent with the view that rents are
based more on market fundamentals, while prices
reflect more speculative and psychological factors,”
he remarks.
Although price-rent ratios for Manhattan have
dropped somewhat in the last four years, they are still
at levels twice those of the mid-1990s. According to
the author, the high ratios can be explained in part by
lower mortgage rates, which tend to raise sales prices
relative to rents by trimming financing costs, and by
lower property taxes. In addition, speculative factors
may have contributed to the long rise in price-rent
ratios, with homebuyers continuing to “bet” that
home prices would appreciate.
Bram sees some signs, however, that high
price-rent ratios have begun to moderate: “While the
analysis here covers the period through 2011, reports
of accelerating rents but stable apartment prices in
2012 suggest that people may have tempered their
expectations for price appreciation.” n

n analysis of housing market trends in
New York City’s borough of Manhattan
suggests that renting an apartment still
offers better financial “value” than
buying one. In “To Buy or Not to Buy? The Changing Relationship between Manhattan Rents and
Home Prices” (Current Issues in Economics and
Finance, vol. 18, no. 9), Jason Bram documents the
movements in home purchase prices relative to
residential rents over the past two decades. He notes
that while both prices and rents have climbed over
the period, prices have increased much more
dramatically—a disparity that raises questions about
the sustainability of current apartment prices.
The metric used by Bram to assess the financial
value of different housing options is the price-rent
ratio. For an individual home, the ratio is simply the
residence’s market price divided by the annual market
rent it would generate. A high ratio suggests that
housing prices are overvalued; a low ratio suggests
the opposite. Bram notes that all the monthly costs
associated with owning a home—maintenance,
mortgage interest, property tax, and any owner costs,
including the opportunity cost of a down payment—
should not be substantially different from what one
would pay in rent. To justify paying a premium to
own, one would need to assume that home prices
were going to appreciate in the future.
Bram tracks the changes in the price-rent ratio
from 1989 to 2011. Following the 1989-1993 downturn, he notes, rents increased steadily while
apartment prices lagged, causing the price-rent ratio
for one- and two-bedroom units to bottom out in the
mid-1990s. In the late 1990s, however, prices climbed
much more quickly than rents, and the price-rent

RESEARCH AND STATISTICS GROUP
3

Research UPDATE n Number 4, 2012

Top Blog Posts of Q4

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.

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 (FOMC) announcements, which occur only
eight times a year.

Below are the top posts in the fourth quarter:

“Grading Student Loans,” by Meta Brown,
Andrew Haughwout, Donghoon Lee, Maricar
Mabutas, and Wilbert van der Klaauw, March 5, –
4,337 downloads

The bloggers examine the overall student loan
debt market as of third-quarter 2011, and find
it likely that delinquency rates for these loans are
understated.
n

“The Puzzling Pre-FOMC Announcement ‘Drift,’”
by David Lucca and Emanuel Moench, July 11 –
2,456 downloads

“Why (or Why Not) Keep Paying Interest on Excess
Reserves?” by Gara Afonso, December 3 –
2,313 downloads
Since October 2008, depository institutions in the
United States have been paid interest on the
balances they hold overnight at Federal Reserve
Banks. Afonso discusses the benefits and costs of
this practice, especially now that excess reserves
have exceeded $1.5 trillion.

“The Different Paths of Greece and Spain to High
Unemployment,” by Thomas Klitgaard and
Ayşegül Şahin, November 28 – 3,334 downloads

Klitgaard and Şahin find that employment in
Greece has fallen proportionally to the country’s
steep decline in GDP, while employment in Spain
has fallen much more than output, due in part to
the country’s notable labor market flexibility.

“‘Too-Big-to-Fail’ Is One Big Phrase,” by Amy
Farber, October 5 – 2,159 downloads
Farber looks back on the origins of the now widely
used phrase “too-big-to-fail,” and notes its usage as
early as the mid-1970s. n

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:
n

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.

@NYFedResearch

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Most Downloaded Publications

SSRN website, fourth-quarter:

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:
n

“Shadow Banking,” by Zoltan Pozsar, Tobias Adrian,
Adam Ashcraft, and Hayley Boesky (Staff Reports,
no. 458, July 2010) – 9,586 downloads
“To Buy or Not to Buy? The Changing Relationship
between Manhattan Rents and Home Prices,” by
Jason Bram (Current Issues in Economics and
Finance, vol. 18, no. 9, 2012) – 4,755 downloads

“Determinants and Impact of Sovereign Credit
Ratings,” by Richard Cantor and Frank Packer
(Economic Policy Review, vol. 2, no. 2,
October 1996) – 304 downloads
“The Shadow Banking System: Implications for
Financial Regulation,” by Tobias Adrian and
Hyun Song Shin (Staff Reports, no. 382, July 2009) –
259 downloads
“The Corporate Governance of Banks,” by Jonathan R.
Macey and Maureen O’Hara (Economic Policy
Review, vol. 9, no. 1, April 2003) – 215 downloads

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

“An Analysis of OTC Interest Rate Derivatives
Transactions: Implications for Public Reporting,” by
Michael Fleming, John Jackson, Ada Li, Asani n
Sarkar, and Patricia Zobel (Staff Reports, no. 557,
March 2012) – 4,069 downloads

Recently Published
Jaison Abel. 2012. “Productivity and the Density
of Human Capital,” with Ishita Dey and Todd M.
Gabe. Journal of Regional Science 52, no. 4
(October): 562-86.

Andrea Ferrero. 2012. “The Macroeconomic Effects
of the Large-Scale Asset Purchase Programs,” with
Han Chen and Vasco Cúrdia. Economic Journal 126,
no. 564 (November): 289-315.

Tobias Adrian. 2012. “Shadow Banking Regulation,”
with Adam B. Ashcraft. Annual Review of Financial
Economics 4, October: 99-140.

Michael Fleming. 2012. “Federal Reserve Liquidity
Provision during the Financial Crisis of 2007-2009.”
Annual Review of Financial Economics 4, October:
161-77.

Nicola Cetorelli and Linda Goldberg. 2012. “Banking
Globalization and Monetary Transmission.” Journal of
Finance 67, no. 5 (October): 1811-43.

Hamid Mehran. 2012. “The Corporate Governance
of Financial Institutions,” with Lindsay Mollineaux.
Annual Review of Financial Economics 4, October:
215-32.

Nicola Cetorelli and Linda Goldberg. 2012. “Liquidity
Management of U.S. Global Banks: Internal Capital
Markets in the Great Recession.” Journal of International Economics 88, no. 2 (November): 299-311.

Tanju Yorulmazer. 2012. “Fire Sale FDI,” with Viral
Acharya and Hyun Song Shin. Korean Economic
Review 27, no. 2 (winter): 163-202. n

RESEARCH AND STATISTICS GROUP
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Research UPDATE n Number 4, 2012

Papers Presented
“House Price Booms, Current Account Deficits, and
Low Interest Rates,” Andrea Ferrero. Management
of Technology and Entrepreneurship/Hautes Études
Commerciales Lausanne conference, Lausanne,
Switzerland, October 3. Also presented at a Graduate
Institute of Geneva seminar, Geneva, Switzerland,
October 4.

“Financial Intermediary Leverage and Financial
Stability,” Tobias Adrian. European Central Bank
conference Bank Funding, Markets, Instruments,
and Implications for Corporate Lending and the Real
Economy, Frankfurt, Germany, October 8. With
Nina Boyarchenko. Also presented at a University of
Zurich seminar, Zurich, Switzerland, November 5; a
University of Lugano seminar, Lugano, Switzerland,
November 7; and a University of Lausanne seminar,
Lausanne, Switzerland, November 8.

“What Explains Japan’s Persistent Deflation?” Andrea
Ferrero. Queens College seminar, New York City,
October 15.

“Evolving Intermediation,” Nicola Cetorelli. Assessing
Financial Intermediation: Measurement and Analysis,
a conference cosponsored by the U.S. Department of
the Treasury’s Office of Financial Research and the
Financial Stability Oversight Council, Washington,
D.C., December 6.

“Trading Activity and Price Transparency in
the Inflation Swap Market,” Michael Fleming.
Commodity Futures Trading Commission
2012 Research Conference, Washington, D.C.,
November 30. With John Sporn.
“Payment Size, Negative Equity, and Mortgage
Default,” Andreas Fuster. Workshop on Consumer
Credit and Payments, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania, November 2.
With Paul Willen.

“DSGE Model-Based Forecasting,” Marco Del Negro.
Macroeconomic Modeling in Times of Crisis, Bank
of France, Paris, France, October 25. With Frank
Schorfheide.
“Rare Shocks, Great Recessions: Forecasting
Commodity Prices,” Marco Del Negro. Methods and
Applications for DSGE Models, a conference cosponsored by the Federal Reserve Bank of Atlanta and
the National Bureau of Economic Research, Atlanta,
Georgia, October 12. With Vasco Cúrdia and Daniel
Greenwald.

“The Inflation-Output Trade-Off Revisited,”
Marc Giannoni. University of Quebec at Montreal
seminar, Quebec, Canada, November 23.
With Gauti Eggertsson.
“Liquidity Management of U.S. Global Banks:
Internal Capital Markets in the Great Recession,”
Linda Goldberg. Issues in the Internationalization of
Banking, Central Bank of Austria, Vienna, Austria,
November 16. With Nicola Cetorelli.

“Capital Controls: A Normative Analysis,” Bianca
De Paoli. International Capital Flows and Spillovers
in a Post-Crisis World, a conference cosponsored by
the Bank of England, the IMF Economic Review, the
Bank of Canada, the University of British Columbia,
St. Andrews University, the Scottish Institute for
Research in Economics, the European Center for
Advanced Research in Economics and Statistics, and
the Centre for Economic Policy Research, London,
England, December 13. Also presented at the Global
Research Forum on International Macroeconomics
and Finance, cosponsored by the European Central
Bank, the Federal Reserve Board, and the Federal
Reserve Bank of New York, Frankfurt, Germany,
December 17.

“Managing Volatile Capital Flows—The Role of
Financial Sector Development,” Linda Goldberg.
Graduate Institute of Geneva seminar, Geneva,
Switzerland, October 24.
“Trends and Debates in Global Banking,” Linda
Goldberg. European Union Studies Center seminar,
City University of New York, New York City,
November 20.
“U.S. Global Banking Data,” Linda Goldberg. Issues in
the Internationalization of Banking, Central Bank of
Austria, Vienna, Austria, November 15. With Nicola
Cetorelli.

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www.newyorkfed.org/research
“The Price Is Right: Updating of Inflation Expectations
in a Randomized Price Information Experiment,”
Wilbert van der Klaauw. Formation and Revision of
Subjective Expectations, a conference cosponsored
by the Inter University Centre on Risk, Economic
Policies, and Employment, Laval University, Quebec
City, Canada, November 9.

“What’s Next Post-Election for Wall Street and the
Economy in General?” Linda Goldberg. Women
Corporate Directors 2012 Annual Fall Institute,
New York City, November 7.
“A User’s Guide on Labor Income Risk,” Fatih
Karahan. Center for the Advanced Study in
Economics Efficiency seminar, Arizona State
University, Phoenix, Arizona. November 9.

“Securitization and the Fixed-Rate Mortgage,”
James Vickery. New York University, Stern School
of Business seminar, New York City, October 1.
With Andreas Fuster. Also presented at the
Federal Reserve Bank of Chicago and University of
Wisconsin-Madison Hulm (Housing-Urban-LaborMacro) Conference, October 5; the Paul Woolley
Centre for Capital Market Dysfunctionality Annual
Conference 2012, University of Technology, Sydney,
Australia, October 12; a University of Florida,
Warrington School of Business research seminar,
Gainesville, Florida, November 30; and an International Monetary Fund seminar, Washington, D.C.,
December 12.

“Banking across Borders,” Friederike Niepmann.
Trinity College-Dublin seminar, Dublin, Ireland,
November 20.
“The Measurement and Behavior of Uncertainty:
Evidence from the ECB Survey of Professional
Forecasters,” Robert Rich. European Central Bank
seminar Directorate Economic Developments,
Frankfurt, Germany, October 11. With Joseph
Song and Joseph Tracy. Also presented at the
National Bank of Poland conference Are We
Really Forward-Looking? Measuring and Testing
Expectations – Central Bank Perspective, Warsaw,
Poland, November 30.

“Determinants of College Major Choice: Identification Using an Information Experiment,” Basit
Zafar. Rutgers University seminar, New Brunswick,
New Jersey, November 30.

“U.S. Dollar Funding Premium of Global Banks,”
Asani Sarkar. European Central Bank conference
Bank Funding, Markets, Instruments, and Implications for Corporate Lending and the Real Economy,
Frankfurt, Germany, October 8. With Warren Hrung.

“How Deeply Held Are Anti-American Attitudes
among Pakistani Youth? Evidence Using Experimental
Variation in Information,” Basit Zafar. Formation
and Revision of Subjective Expectations, a conference
cosponsored by the Inter University Centre on
Risk, Economic Policies, and Employment, Laval
University Quebec City, Canada, November 8. n

RESEARCH AND STATISTICS GROUP
7

Research UPDATE n Number 4, 2012

New Titles in the Staff Reports Series
International

across exporters. First, they develop a theoretical
framework in which firms with high import shares
and high market shares have low exchange rate
pass-through. Second, they test and quantify the
theoretical mechanisms using Belgian firm-productlevel data with information on exports by destination
and imports by source country. The authors find
that a small exporter with no imported inputs has
a nearly complete pass-through, while a firm at the
95th percentile of both import intensity and market
share distributions has a pass-through of 56 percent,
with the marginal cost and markup channels playing roughly equal roles. The largest exporters are
simultaneously high-market-share and high-import-
intensity firms, which helps explain the low aggregate
pass-through and exchange rate disconnect observed
in the data.

No. 576, October 2012
Banking across Borders
Friederike Niepmann
This paper develops and tests a theoretical model
that allows for the endogenous decision of banks to
engage in international and global banking. International banking, where banks raise capital in the home
market and lend it abroad, is driven by differences
in factor endowments across countries. In contrast,
global banking, where banks intermediate capital
locally in the foreign market, arises from differences
in country-level bank efficiency. Together, these
two driving forces determine the foreign assets and
liabilities of a banking sector. The model provides
a rationale for the observed rise in global banking
relative to international banking. Its key predictions
regarding the cross-country pattern of foreign bank
asset and liability holdings are strongly supported by
the data.

Microeconomics
No. 587, December 2012
Agglomeration and Job Matching among
College Graduates
Jaison R. Abel and Richard Deitz

No. 584, December 2012
Exchange Rate Pass-Through, Markups,
and Inventories
Adam Copeland and James A. Kahn

Abel and Deitz study one potential source of urban
agglomeration economies: better job matching.
Focusing on college graduates, they construct two
direct measures of job matching based on how well
an individual’s job corresponds to his or her college
education. Consistent with matching-based theories
of urban agglomeration, they find evidence that
larger and thicker local labor markets help college
graduates find better jobs by increasing both the
likelihood and quality of a match. The authors then
assess the extent to which better job matching of
college-educated workers increases individual-level
wages and thereby contributes to the urban wage
premium. While they find that college graduates
with better job matches do indeed earn higher wages
on average, the contribution of such job matching
to aggregate urban productivity appears to be
relatively modest.

A large body of research has established that
exporters do not fully adjust their prices across countries in response to exchange rate movements, but
instead allow their markups to vary. But while markups are difficult to observe directly, Copeland and
Kahn show that inventory-sales ratios provide an
observable counterpart. They then find evidence that
inventory-sales ratios of imported vehicles respond
to exchange rate movements to a degree consistent
with pass-through on the order of 50 to 75 percent,
on the high end of the range found in the literature.
No. 586, December 2012
Importers, Exporters, and Exchange
Rate Disconnect
Mary Amiti, Oleg Itskhoki, and Jozef Konings
Large exporters are simultaneously large importers.
Amiti, Itskhoki, and Konings show that this pattern
is key to understanding low aggregate exchange rate
pass-through as well as the variation in pass-through

federal reserve bank of new york
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Banking and Finance

1) sovereign risk on average has a statistically and
economically significant influence on corporate credit
risks (all else equal, a 100 basis point increase in the
sovereign CDS spread leads to an increase in corporate CDS spreads of 71 basis points); 2) the sovereigncorporate relation varies across corporations, with
state-owned companies exhibiting a stronger relation
with the sovereign; and 3) the presence of strong
property rights institutions, however, tends to weaken
the connection. In contrast, contracting institutions
(offering protection of creditor rights or minority
shareholder rights) do not appear to matter much in
this context.

No. 577, October 2012
On Bounding Credit Event Risk Premia
Jennie Bai, Pierre Collin-Dufresne,
Robert S. Goldstein, and Jean Helwege
Reduced-form models of default that attribute a
large fraction of credit spreads to compensation for
credit event risk typically preclude the most plausible
economic justification for such risk to be priced—
namely, a “contagious” response of the market portfolio during the credit event. When this channel is
introduced within a general-equilibrium framework
for an economy comprised of a large number of firms,
credit event risk premia have an upper bound of just
a few basis points and are dwarfed by the contagion
premium. The authors provide empirical evidence
supporting the view that credit event risk premia
are minuscule.

No. 580, October 2012
Shadow Banking: A Review of the Literature
Tobias Adrian and Adam B. Ashcraft
Adrian and Ashcraft provide an overview of the
rapidly evolving literature on shadow credit
intermediation. The shadow banking system consists
of a web of specialized financial institutions that
conduct credit, maturity, and liquidity transformation
without direct, explicit access to public backstops. The
lack of such access to sources of government liquidity
and credit backstops makes shadow banks inherently
fragile. Much of shadow banking activities is intertwined
with the operations of core regulated institutions such
as bank holding companies and insurance companies,
thus creating a source of systemic risk for the financial
system at large. The authors review fundamental
reasons for the existence of shadow banking, explain
the functioning of shadow banking institutions and
activities, discuss why shadow banks need to be
regulated, and review the impact of recent reform
efforts on shadow banking credit intermediation.

No. 578, October 2012
Have Financial Markets Become More Informative?
Jennie Bai, Thomas Philippon, and Alexi Savov
The finance industry has grown. Financial markets
have become more liquid. Information technology
has improved. But have prices become more informative? Using stock and bond prices to forecast earnings,
Bai, Philippon, and Savov find that the information
content of market prices has not increased since
1960. The magnitude of earnings surprises, however,
has increased. A baseline model predicts that as the
efficiency of information production increases, prices
become more disperse and covary more strongly with
future earnings. The forecastable component of earnings improves capital allocation and serves as a direct
measure of welfare. The authors find that this measure
has remained stable. A model with endogenous information acquisition predicts that an increase in fundamental uncertainty also increases informativeness as
the incentive to produce information grows. The study
finds that uncertainty has indeed increased outside of
the S&P 500, but price informativeness has not.

No. 581, November 2012
Forecasting through the Rear-View Mirror:
Data Revisions and Bond Return Predictability
Eric Ghysels, Casidhe Horan, and Emanuel Moench
Real-time macroeconomic data reflect the informa
tion available to market participants, whereas final
data—containing revisions and released with a
delay—overstate the information set available to
them. Ghysels, Horan, and Moench document that
the in-sample and out-of-sample Treasury return
predictability is significantly diminished when realtime as opposed to revised macroeconomic data are
used. In fact, much of the predictive information in
macroeconomic time series is due to the data revision
and publication lag components.

No. 579, October 2012
When Is There a Strong Transfer Risk
from the Sovereigns to the Corporates?
Property Rights Gaps and CDS Spreads
Jennie Bai and Shang-Jin Wei
Using a novel credit default swaps (CDS) data set
covering government and corporate entities across
thirty countries, Bai and Wei study both the average strength of the transfer risks and the role of
institutions in mitigating such risks. They find that:

RESEARCH AND STATISTICS GROUP
9

Research UPDATE n Number 4, 2012
No. 582, November 2012
Payment Size, Negative Equity, and
Mortgage Default
Andreas Fuster and Paul S. Willen

No. 589, December 2012
No Good Deals—No Bad Models
Nina Boyarchenko, Mario Cerrato, John Crosby, and
Stewart Hodges

Surprisingly little is known about the importance
of mortgage payment size for default, as efforts to
measure the treatment effect of rate increases or loan
modifications are confounded by borrower selection. Fuster and Willen study a sample of hybrid
adjustable-rate mortgages that have experienced large
rate reductions over the past years and are largely
immune to these selection concerns. They show that
interest rate changes dramatically affect repayment
behavior. Their estimates imply that cutting a borrower’s payment in half reduces his hazard of becoming delinquent by about two-thirds, an effect that is
approximately equivalent to lowering the borrower’s
combined loan-to-value ratio from 145 to 95 (holding the payment fixed). These findings shed light on
the driving forces behind default behavior and have
important implications for public policy.

Faced with the problem of pricing complex contingent claims, investors seek to make their valuations
robust to model uncertainty. Boyarchenko et al.
construct a notion of a model-uncertainty-induced
utility function, and show that model uncertainty
increases investors’ effective risk aversion. Using
this utility function, they extend the “no good deals”
methodology of Cochrane and Saá-Requejo (2000)
to compute lower and upper good-deal bounds in the
presence of model uncertainty. The authors illustrate
the methodology using some numerical examples.

Quantitative Methods
No. 574, October 2012
The Forward Guidance Puzzle
Marco Del Negro, Marc Giannoni, and
Christina Patterson
With short-term interest rates at the zero lower
bound, forward guidance has become a key tool for
central bankers, and yet we know little about its
effectiveness. Standard medium-scale DSGE models
tend to grossly overestimate the impact of forward
guidance on the macroeconomy—a phenomenon
the authors call the “forward guidance puzzle.”
Del Negro, Giannoni, and Patterson explain why this
is the case and describe one approach to addressing
this issue.

No. 583, November 2012
Discussion of “An Integrated Framework for
Multiple Financial Regulations”
Tobias Adrian
A 2012 paper by Goodhart, Kashyap, Tsomocos, and
Vardoulakis (GKTV) proposes a dynamic generalequilibrium framework that provides a conceptual—
and to some extent quantitative—framework for the
analysis of macroprudential policies. The distinguishing feature of GKTV’s paper relative to any other on
macroprudential policy is its study of a setting with
multiple financial frictions that permits the analysis
of multiple macroprudential policy tools at the same
time. The modeling approach includes various market
failures such as incomplete markets with heterogeneous agents, “fire-sale” externalities, and margin
spirals, all of which provide rationales for policies
designed to improve welfare. In GKTV’s model,
liquidity ratios are found to be more efficient preemptive tools than capital ratios or loan-to-value ratios.
However, these liquidity ratios need to be relaxed
in times of crisis in order to reduce adverse effects
from fire-sale externalities. It remains to be seen how
robust these findings are in alternative, fully dynamic
settings. Furthermore, GKTV’s approach does not
address the tension between micro- and macro
prudential objectives, and the timing of the buildup
and release of policies is not specified precisely.

No. 575, October 2012
Assessing the Quality of “Furfine-Based”
Algorithms
Olivier Armantier and Adam Copeland
To conduct academic research on the federal funds
market, historically one of the most important
financial markets in the United States, some empirical
economists have used market-level measures
published by the Markets Group of the Federal
Reserve Bank of New York. To obtain more disaggregate data, some researchers have relied on a separate
source of information: individual transactions
inferred indirectly from an algorithm based on the
work of Furfine (1999). To date, however, the
accuracy of this algorithm has not been formally
established. Armantier and Copeland conduct a test
aimed at assessing the ability of the algorithm to
correctly identify individual overnight fed funds

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www.newyorkfed.org/research
transactions conducted by two banks that are among
the most active in the fed funds market. The results
are discouraging. The authors estimate the average
type I and type II errors from 2007 to 2011 to be
81 percent and 23 percent, respectively. Furthermore,
they argue that these errors: 1) apply to almost half of
the algorithm’s output, 2) introduce systematic biases,
and 3) may not subside when the algorithm’s output
is aggregated. Their results therefore raise serious
concerns about the appropriateness of using the
algorithm’s output to study the fed funds market.
Because the Markets Group relies on a different
source of data than the algorithm output, the authors’
results have no bearing on the Group’s understanding
of the fed funds market and its calculation of market
level measures, including the effective fed funds rate.

from individual histograms. The uncertainty mea
sures display countercyclical behavior, and there is
evidence of increased uncertainty for output growth
and inflation since 2007. The results also indicate
that uncertainty displays a very weak relationship
with forecast dispersion, corroborating the findings
of other recent studies indicating that disagreement
is not a valid proxy for uncertainty. In addition, the
authors find no correspondence between movements
in uncertainty and predictive accuracy, suggesting
that time-varying conditional variance estimates may
not provide a reliable proxy for uncertainty. Last,
using a regression equation that can be interpreted as
a (G)ARCH-M-type model, the authors find limited
evidence of linkages between uncertainty and levels
of inflation and output growth.

No. 585, December 2012
Rare Shocks, Great Recessions
Vasco Cúrdia, Marco Del Negro, and Daniel Greenwald

No. 590, December 2012
Liquidity, Volatility, and Flights to Safety
in the U.S. Treasury Market: Evidence from
a New Class of Dynamic Order Book Models
Robert Engle, Michael Fleming, Eric Ghysels, and
Giang Nguyen

The authors estimate a DSGE model in which rare,
large shocks can occur, but replace the commonly
used Gaussian assumption with a student’s t-distribu
tion. Results from the Smets and Wouters (2007)
model estimated on the usual set of macroeconomic
time series over the 1964-2011 period indicate that:
1) the student’s t-specification is strongly favored by
the data, even when one allows for low-frequency
variation in the volatility of the shocks, and 2) the
estimated degrees of freedom are quite low for
several shocks that drive U.S. business cycles,
implying an important role for rare, large shocks.
This result holds even if the authors exclude the
Great Recession from the sample. They also show
that inference about low-frequency changes in
volatility—and, in particular, inference about the
magnitude of the Great Moderation—is different
once they allow for fat tails.

The authors propose a new class of dynamic order
book models that allow them to: 1) study episodes
of extreme low liquidity and 2) unite liquidity and
volatility in one framework through which their
joint dynamics can be examined. Liquidity and
volatility in the U.S. Treasury securities market are
analyzed around the time of economic announce
ments, throughout the recent financial crisis, and
during flight-to-safety episodes. Engle et al. document
that Treasury market depth declines sharply during
the crisis, accompanied by increased price volatil
ity, but trading activity seems unaffected until after
the Lehman Brothers bankruptcy. The models’
key finding is that price volatility and depth at the
best bid and ask prices exhibit a negative feedback
relationship and that each becomes more persistent
during the crisis. Lastly, the authors characterize the
Treasury market during flights to safety as having
much lower market depth, along with higher trading
volume and greater price uncertainty. n

No. 588, December 2012
The Measurement and Behavior of Uncertainty:
Evidence from the ECB Survey of Professional
Forecasters
Robert Rich, Joseph Song, and Joseph Tracy
Rich, Song, and Tracy use matched-point and density
forecasts of output growth and inflation from the
ECB Survey of Professional Forecasters to derive
measures of forecast uncertainty, forecast dispersion,
and forecast accuracy. They construct uncertainty
measures from aggregate density functions as well as

RESEARCH AND STATISTICS GROUP
11

Research UPDATE n Number 4, 2012

Research and Statistics Group Publications and Posts:
October–December 2012
No. 575, October 2012
Assessing the Quality of “Furfine-Based”
Algorithms
Olivier Armantier and Adam Copeland

Publications are available at www.newyorkfed.org/
research/publication_annuals/index.html or may be
accessed by clicking on the publication titles below.

ECONOMIC POLICY REVIEW,
VOL. 18

No. 576, October 2012
Banking across Borders
Friederike Niepmann

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

No. 577, October 2012
On Bounding Credit Event Risk Premia
Jennie Bai, Pierre Collin-Dufresne,
Robert S. Goldstein, and Jean Helwege

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

No. 578, October 2012
Have Financial Markets Become More Informative?
Jennie Bai, Thomas Philippon, and Alexi Savov

The Federal Reserve’s Term Asset-Backed Securities
Loan Facility

No. 579, October 2012
When Is There a Strong Transfer Risk
from the Sovereigns to the Corporates?
Property Rights Gaps and CDS Spreads
Jennie Bai and Shang-Jin Wei

Adam Ashcraft, Allan Malz, and Zoltan Pozsar

CURRENT ISSUES IN ECONOMICS
AND FINANCE, VOL. 18
No. 7
Job Polarization and Rising Inequality in
the Nation and the New York–Northern
New Jersey Region
Jaison R. Abel and Richard Deitz

No. 580, October 2012
Shadow Banking: A Review of the Literature
Tobias Adrian and Adam B. Ashcraft
No. 581, November 2012
Forecasting through the Rear-View Mirror:
Data Revisions and Bond Return Predictability
Eric Ghysels, Casidhe Horan, and Emanuel Moench

No. 8
How Severe Was the Credit Cycle in the New York–
Northern New Jersey Region?
Jaison R. Abel and Richard Deitz

No. 582, November 2012
Payment Size, Negative Equity, and
Mortgage Default
Andreas Fuster and Paul S. Willen

No. 9
To Buy or Not to Buy? The Changing Relationship
between Manhattan Rents and Home Prices
Jason Bram

No. 583, November 2012
Discussion of “An Integrated Framework for
Multiple Financial Regulations”
Tobias Adrian

STAFF REPORTS
No. 574, October 2012
The Forward Guidance Puzzle
Marco Del Negro, Marc Giannoni, and
Christina Patterson

No. 584, December 2012
Exchange Rate Pass-Through, Markups,
and Inventories
Adam Copeland and James A. Kahn

federal reserve federal
bank of new
reserve
york
bank of new york
12

www.newyorkfed.org/research
No. 585, December 2012
Rare Shocks, Great Recessions
Vasco Cúrdia, Marco Del Negro, and
Daniel L. Greenwald

No. 589, December 2012
No Good Deals—No Bad Models
Nina Boyarchenko, Mario Cerrato, John Crosby, and
Stewart Hodges

No. 586, December 2012
Importers, Exporters, and Exchange
Rate Disconnect
Mary Amiti, Oleg Itskhoki, and Jozef Konings

No. 587, December 2012
Agglomeration and Job Matching among
College Graduates
Jaison R. Abel and Richard Deitz
No. 588, December 2012
The Measurement and Behavior of Uncertainty:
Evidence from the ECB Survey of Professional
Forecasters
Robert Rich, Joseph Song, and Joseph Tracy

Liberty Street Economics Blog
October 1
Is U.S. Monetary Policy Seasonal?
Richard Crump and David Lucca

October 29
Weakness in the U.S. IPO Market
Stavros Peristiani

October 3
The New Bank Resolution Regimes and
“Too‑Big‑to-Fail”
Jennie Bai, Christian Cabanilla, and
Menno Middeldorp

October 31
In a Relationship: Evidence of Underwriters’
Efforts to Stabilize the Share Price
in the Facebook IPO
Thomas Eisenbach, David Lucca, and Karen Shen

October 5
Historical Echoes: “Too-Big-to-Fail” Is One
Big Phrase
Amy Farber

November 2
Historical Echoes: FOMC … “Minutes” by Minutes
Kathleen McKiernan
November 5
Nudging Inflation Expectations: An Experiment
Basit Zafar, Olivier Armantier, Scott Nelson,
Giorgio Topa, and Wilbert van der Klaauw

October 10
Tracking the U.S. Banking Industry
Dafna Avraham, Tara Sullivan, and James Vickery
October 12
Historical Echoes: It’s Not Easy Being Green
Amy Farber

November 7
Federal Reserve Liquidity Facilities Gross
$22 Billion for U.S. Taxpayers
Michael Fleming

October 15
The Minimum Balance at Risk: A Proposal
to Stabilize Money Market Funds
Marco Cipriani, Michael Holscher, Antoine Martin,
and Patrick McCabe

November 9
Historical Echoes: How Do You Say “Wall Street”
in Latin?
Marco Del Negro and Mary Tao

RESEARCH AND STATISTICS GROUP
13

Research UPDATE n Number 4, 2012
November 14
Income Flows from U.S. Foreign Assets
and Liabilities
Matthew Higgins and Thomas Klitgaard

November 30
Historical Echoes: The Aftermath of a Devastating
Hurricane . . . in 1938
Jason Bram and Kara Masciangelo

November 15
Just Released: November Empire State
Manufacturing Survey Points to Storm’s Effects
Jason Bram and Richard Deitz

December 3
Why (or Why Not) Keep Paying Interest
on Excess Reserves?
Gara Afonso

November 16
Historical Echoes: 1947 Banking Basics,
Step by Step
Amy Farber

Just Released: Money and Payments Workshop
Examines Financial Market Structure
Thomas Eisenbach
December 17
Just Released: December Empire State
Manufacturing Survey
Jason Bram and Richard Deitz

November 19
Compensation Growth and Slack in the Current
Economic Environment
M. Henry Linder, Richard Peach, and Robert Rich

What Are the Costs of Superstorm Sandy?
Jaison R. Abel, Jason Bram, Richard Deitz, and
James Orr

November 21
Doing Well by Doing Good? Community
Development Venture Capital
Anna Kovner

December 18
The Welfare Costs of Superstorm Sandy
Jason Bram

November 23
Historical Echoes: Reverse Bank Run, Or When
the Money Came Rollin’ In
Mary Tao

December 19
The Impact of Superstorm Sandy on New York City
School Closures and Attendance
Rajashri Chakrabarti and Max Livingston

November 26
Household Services Expenditures: An Update
Jonathan McCarthy

December 20
How Will We Pay for Superstorm Sandy?
Jaison R. Abel, Jason Bram, Richard Deitz, and
James Orr

November 28
Just Released: New York’s Latest Beige Book
Report Points to Weakening in the Aftermath
of Superstorm Sandy
Jaison R. Abel and Jason Bram

December 21
The Path of Economic Recovery from
Superstorm Sandy
Jaison R. Abel, Jason Bram, Richard Deitz, and
James Orr

The Different Paths of Greece and Spain
to High Unemployment
Thomas Klitgaard and Ayşegül Şahin

December 31
Why Isn’t the Thirty-Year Fixed-Rate Mortgage
Rate at 2.6 Percent?
Andreas Fuster and David Lucca

November 29
Just Released: Press Briefing on Housing
Conditions and the Economic Impact of
Superstorm Sandy on the Region
Jaison R. Abel, Jason Bram, and Claire Kramer

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.
federal reserve bank of new york
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Full text of Research Update : Number 4, 2012

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