Speech At "Age of Advancement: The Intricacies of a Digital World" 2020 Banking Outlook Conference sponsored by the Federal Reserve Bank of Atlanta, Atlanta, Georgia
Speech At the 2020 U.S. Monetary Policy Forum, sponsored by the Initiative on Global Markets at the University of Chicago Booth School of Business, New York, New York
Speech At the Yale Law School, New Haven, Connecticut
Speech At the Conference for Community Bankers sponsored by The American Bankers Association, Orlando, Florida
Speech At the Money Marketeers of New York University, New York, New York
Speech At the Symposium on the Future of Payments, Stanford, California
Speech At the American Bar Association Banking Law Committee Meeting 2020, Washington, D.C.
Speech At the 2020 Economic Forecast Breakfast, Home Builders Association of Greater Kansas City, Kansas City, Missouri
Speech At the C. Peter McColough Series on International Economics, Council on Foreign Relations, New York, New York
WASHINGTON—FINRA, Cboe Global Markets, The Nasdaq Stock Market LLC, the New York Stock Exchange, and their affiliated Exchanges (collectively, “Exchanges”) today announced that they censured Credit Suisse Securities (USA) LLC, and fined the firm a total of $6.5 million for supervisory violations and violations of various provisions of Rule 15c3-5 of the Securities Exchange Act of 1934 (known as the Market Access Rule). The fine was apportioned among FINRA and the Exchanges.
WASHINGTON – FINRA announced today that it has sanctioned five firms—Citigroup Global Markets Inc.; J.P. Morgan Securities LLC; LPL Financial LLC; Morgan Stanley Smith Barney LLC; and Merrill Lynch, Pierce, Fenner & Smith Incorporated—for failing to reasonably supervise compliance with FINRA Rule 2090, FINRA’s “Know Your Customer” rule.
WASHINGTON—FINRA today released its 2020 Risk Monitoring and Examination Priorities Letter, highlighting new priorities as well as identifying areas of ongoing concern that FINRA will continue to focus on in the coming year.
WASHINGTON — FINRA today for the first time posted weekly, aggregate data on the trading volume of Treasury securities reported to TRACE®, FINRA’s Trade Reporting and Compliance Engine®.
Washington, DC – Female investors lag behind their male counterparts when it comes to investment knowledge and confidence, according to new research conducted by the FINRA Investor Education Foundation (FINRA Foundation) and the George Washington University School of Business' Global Financial Literacy Excellence Center (GFLEC).
WASHINGTON – FINRA’s Board of Governors met on March 11 for the first time in 2020. During the meeting, held remotely in light of the coronavirus outbreak, the Board discussed a variety of topics, including FINRA’s long-term planning and financial sustainability.
WASHINGTON—FINRA announced today that it has ordered Oppenheimer & Co. Inc. to pay more than $3.8 million in restitution to customers who incurred potentially excessive sales charges caused by early rollovers of Unit Investment Trusts (UITs). FINRA also fined the firm $800,000 for failing to reasonably supervise early UIT rollovers.
WASHINGTON – FINRA announced today that it has named Greg Ruppert as Executive Vice President, National Cause and Financial Crimes Detection Programs. Ruppert will join FINRA March 23 and will report directly to Bari Havlik, Executive Vice President, Member Supervision.
“Detecting fraud and addressing it quickly is core to our mission of investor protection and market integrity,” said Havlik, “Under Greg’s leadership, we will build upon the successful work our teams have already done on behalf of investors.”
WASHINGTON – FINRA’s Board of Governors met on Dec. 4-5 at FINRA’s offices in New York, where it approved two rule proposals, received several operational updates and reaffirmed FINRA’s Financial Guiding Principles.
WASHINGTON — Samuel Lek, former Chief Executive Officer of Lek Securities Corporation (Lek Securities), has been permanently barred from the securities industry in all capacities, and Lek Securities was fined $900,000 for violating, among other things, FINRA and Exchange supervisory rules, and Rule 15c3-5 of the Securities Exchange Act of 1934 (the Market Access Rule). The actions were taken by FINRA, along with The NASDAQ Stock Market LLC, the New York Stock Exchange LLC, Cboe Global Markets, and certain of their affiliated Exchanges (collectively, Exchanges).
Today, the Securities and Exchange Commission announced that it is providing additional temporary regulatory relief to market participants in response to the effects of the Coronavirus Disease 2019 (COVID-19). The actions announced today involve (1)…
Today, the Securities and Exchange Commission announced that it is extending the filing periods covered by its previously enacted conditional reporting relief for certain public company filing obligations under the federal securities laws, and that it is…
The Securities and Exchange Commission today announced charges against Justin W. Keener d/b/a JMJ Financial for failing to register as a securities dealer with the SEC. Keener allegedly bought and sold billions of newly issued shares of penny stock,…
The Securities and Exchange Commission today announced awards totaling over $570,000 to two whistleblowers who provided significant information and assistance that helped the Commission bring multiple successful enforcement actions. The first…
The Securities and Exchange Commission today announced temporary flexibility for registered funds affected by recent market events to borrow funds from certain affiliates and to enter into certain other lending arrangements. Today’s relief is designed to…
The Securities and Exchange Commission today announced an award of more than $1.6 million to a whistleblower whose information tipped the agency to securities law violations and helped form part of the basis for charges brought in a successful…
The Securities and Exchange Commission today announced that it is providing conditional regulatory relief for registered transfer agents and certain other persons with regulatory obligations under the federal securities laws. …
The U.S. Securities and Exchange Commission noticed for immediate effectiveness a proposed rule filing submitted by New York Stock Exchange LLC (NYSE) to facilitate electronic auctions in light of its decision to temporarily close its New York trading…
The Securities and Exchange Commission today announced that it has obtained an asset freeze and other emergency relief to halt an ongoing securities fraud perpetrated by a former state senator and two others who bilked investors in and outside the U.S.…
Today, jurors in New Haven, Connecticut, federal court returned a verdict in the Securities and Exchange Commission's favor against an investment adviser and its owner.
The jury found that Westport Capital Markets, LLC, a Connecticut-based…
Federal Reserve offers regulatory reporting relief to small financial institutions affected by the coronavirus
Federal Reserve provides additional information to financial institutions on how its supervisory approach is adjusting in light of the coronavirus
Federal Reserve Board announces implementation delay for changes to its Payment System Risk Policy regarding intraday credit
Federal Reserve System publishes annual financial statements
Federal Reserve Board announces technical change to support the U.S. economy and allow banks to continue lending to creditworthy households and businesses
Federal Reserve announces extensive new measures to support the economy
Federal Reserve issues FOMC statement
Federal Reserve Board expands its program of support for flow of credit to the economy by taking steps to enhance liquidity and functioning of crucial state and municipal money markets
Coordinated central bank action to further enhance the provision of U.S. dollar liquidity
Federal Reserve Board encouraged by increase in discount window borrowing to support the flow of credit to households and businesses
We tested the Bureau's processes for categorizing cybersecurity events and ensuring the timely closure of related cybersecurity incident tickets. We completed this testing as part of our 2019 audit of the Bureau's information security program.
Our testing showed that the Bureau is not consistently categorizing information security events in its cybersecurity incident response tickets. This could negatively affect the Bureau's analysis of these events as well as the resulting responses to any confirmed security incidents. This memorandum provides the details of our testing results to facilitate the Bureau's ongoing efforts to address a recommendation from our 2019 audit to strengthen controls in this area.
Given the sensitivity of our review, this memorandum is restricted.
We tested the data exfiltration controls and related technologies used by the Bureau. We completed this testing as part of our 2019 audit of the Bureau's information security program.
Our testing found that the Bureau could improve its data exfiltration controls throughout its environment. This memorandum provides the details of our testing results to facilitate the Bureau's ongoing actions to address our recommendation from our 2019 audit to strengthen controls in this area.
The Board delegates to Reserve Banks the authority to supervise certain financial institutions in their Districts, with oversight by the Board. Significant supervisory concerns about an institution could lead to the use of various enforcement tools to compel its management to address the issues. We assessed the effectiveness of the Board's and the Reserve Banks' enforcement action monitoring practices.
The Reserve Banks in our sample have implemented some effective practices for monitoring enforcement actions. However, they use different information systems for monitoring enforcement actions against institutions in the community banking organization portfolio. Also, in certain instances, Reserve Bank staff did not post supervised institutions' progress reports describing their enforcement action remediation efforts to the required system of record.
Our report contains a recommendation designed to enhance the effectiveness of the Board's enforcement action monitoring practices.
We contracted with an independent public accounting firm to audit the financial statements of the Board as of and for the years ended December 31, 2019 and 2018, and to audit the Board's internal control over financial reporting as of December 31, 2019. We reviewed and monitored the work of the firm to ensure compliance with applicable auditing standards and the contract.
In the firm's opinion, the financial statements present fairly, in all material respects, the financial position of the Board as of December 31, 2019 and 2018, and the Board maintained effective internal control over financial reporting as of December 31, 2019.
The Board performs the accounting function for the Federal Financial Institutions Examination Council, and we contracted with an independent public accounting firm to audit the FFIEC's financial statements as of and for the years ended December 31, 2019 and 2018. We reviewed and monitored the work of the firm to ensure compliance with applicable auditing standards and the contract.
In the firm's opinion, the financial statements present fairly, in all material respects, the financial position of the Federal Financial Institutions Examination Council as of December 31, 2019 and 2018.
Financial market utilities—systems that transfer, clear, or settle payments and other transactions among financial institutions—may be designated by the Financial Stability Oversight Council as systematically important. A failure or disruption of a designated financial market utility could affect the smooth functioning of financial markets or financial stability. As such, the Dodd-Frank Act allows for enhanced federal supervision of DFMUs. We assessed the effectiveness of the Board's oversight of its DFMU supervision program.
The Board has implemented practices and processes for its DFMU supervision program governance, its collaboration with other supervisory agencies, and its reviews of material changes filed by DFMUs. However, it can make enhancements in these areas, such as by fully defining certain roles and responsibilities related to governance, focusing on and tracking key issues when collaborating with other authorities, and better preparing for emergency changes filed by DFMUs.
This report contains recommendations.
Senior examiners at Reserve Banks are restricted from working for institutions they have supervised in the last year. The penalties for violating this restriction may include an industrywide prohibition for up to 5 years and a civil monetary penalty of up to $250,000. We evaluated Board and Reserve Bank controls for ensuring that this postemployment restriction is followed.
The Reserve Banks we evaluated each have policies and procedures for identifying and notifying employees subject to the postemployment restriction and for reviewing their work as appropriate. However, these Reserve Banks have taken different approaches to designating senior examiners, and the Board has not issued guidance clearly defining which employees should be considered senior examiners.
We recommend that the Board issue such guidance to promote consistency in applying postemployment restrictions to senior examiners.
When the Bureau identifies a federal consumer financial protection law violation, the agency or a court can issue final orders requiring the defendants to pay monetary penalties and face additional oversight. As of April 2019, the agency's Office of Enforcement was responsible for monitoring defendants' compliance with final orders containing more than 3,000 provisions. We evaluated how effectively Enforcement monitors and conducts follow-up on final orders.
Enforcement has implemented some effective practices, such as establishing a centralized team and a database to track compliance with final orders, but it can make further improvements. For example, Enforcement can ensure it has the resources necessary to complete follow-up activities according to its expectations and can clarify information on the Bureau's website on the status of public enforcement actions.
A Camden woman was sentenced today to 46 months in prison for accessing a protected computer without authorization, stealing money from her employer, and then laundering the proceeds of her theft, U.S. Attorney Craig Carpenito announced.
Wells Fargo & Co. and its subsidiary, Wells Fargo Bank, N.A., have agreed to pay $3 billion to resolve three separate matters stemming from a years-long practice of pressuring employees to meet unrealistic sales goals—which led thousands of employees to provide millions of accounts or products to customers under false pretenses or without consent, often by creating false records or misusing customers' identities, the Department of Justice announced today.
An Open Board meeting of the Board of Governors of the Federal Reserve System was held at 9:30 a.m. on January 30, 2020. Matter(s) considered: Notice of Proposed Rulemaking on Section 13 of the Bank Holding Company Act (Volcker Rule). Final Rule to Revise the Board's Control Framework.
A closed meeting of the Board of Governors of the Federal Reserve System will be held at 11:30 a.m. on January 21, 2020. Matter(s) considered: Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.
Robert J. Barro and Gordon Y. Liao | We derive an option-pricing formula from recursive preference and estimate rare disaster probability. The new options-pricing formula applies to far-out-of-the money put options on the stock market when disaster risk dominates, the size distribution of disasters follows a power law, and the economy has a representative agent with Epstein-Zin utility. The formula conforms with options data on the S&P 500 index from 1983-2018 and for analogous indices for other countries. The disaster probability, inferred from monthly fixed effects, is highly correlated across countries, peaks during the 2008-2009 financial crisis, and forecasts equity index returns and growth vulnerabilities in the economy.
Original paper: PDF
Hie Joo Ahn and Leland D. Crane | We develop a dynamic decomposition of the empirical Beveridge curve, i.e., the level of vacancies conditional on unemployment. Using a standard model, we show that three factors can shift the Beveridge curve: reduced-form matching efficiency, changes in the job separation rate, and out-of-steady-state dynamics. We find that the shift in the Beveridge curve during and after the Great Recession was due to all three factors, and each factor taken separately had a large effect. Comparing the pre-2010 period to the post-2010 period, a fall in matching efficiency and out-of-steady-state dynamics both pushed the curve upward, while the changes in the separations rate pushed the curve downward. The net effect was the observed upward shift in vacancies given unemployment. In previous recessions changes in matching efficiency were relatively unimportant, while dynamics and the separations rate had more impact. Thus, the unusual feature of the Great Recession was the deterioration in matching efficiency, while separations and dynamics have played significant, partially offsetting roles in most downturns. The importance of these latter two margins contrasts with much of the literature, which abstracts from one or both of them. We show that these factors affect the slope of the empirical Beveridge curve, an important quantity in recent welfare analyses estimating the natural rate of unemployment.
Travis Berge, Maarten De Ridder and Damjan Pfajfar | We synthesize the recent, at times conflicting, empirical literature regarding whether fiscal policy is more effective during certain points in the business cycle. Evidence of state dependence in the multiplier depends critically on how the business cycle is defined. Estimates of the fiscal multiplier do not change when the unemployment rate is above or below its trend. However, we find that the multiplier is higher when the unemployment rate is increasing relative to when it is decreasing. This result holds using both a long time-series at the U.S. national level and for a panel of U.S. states.
Jean Flemming | Even though workers in the UK spent just 1,000 pounds on commuting in 2017, the economic loss may be far higher because of the congestion externality arising from the way in which one worker's commute affects the commuting time of others. I provide empirical evidence that commuting time affects job acceptance, pointing to large indirect costs of congestion. To interpret the empirical facts and quantify the costs of congestion, I build a model featuring a frictional labor market within a metropolitan area. By endogenizing commuting congestion in a labor search model, the model connects labor market responses to urban policies. Workers evaluate job offers based on their productivity and commuting costs, taking congestion as given, but by accepting and commuting to distant jobs, affect other workers' labor market outcomes. Through this mechanism, equilibrium moving decisions, housing rent, and wages are tightly linked to congestion. Calibrating the model to the local la bor market around London, I show that the effect of the congestion externality is to significantly decrease welfare and increase wage inequality. I quantify the effects of a congestion tax on labor market outcomes, and show that the welfare-maximizing tax has substantial negative effects on inequality, but comes at a cost of higher unemployment.
Danilo Cascaldi-Garcia and Ana Beatriz Galvao | We provide novel evidence that technological news and uncertainty shocks, identified one at a time using VAR models as in the literature, are correlated; that is, they are not truly structural. We then proceed by proposing an identification scheme to disentangle the effects of news and financial uncertainty shocks. We find that by removing uncertainty effects from news shocks, the positive responses of economic activity to news shocks are strengthened in the short term; and that the negative responses of activity to financial uncertainty shocks are deepened in the medium term as `good uncertainty' effects on technology are purged.
Original paper: PDF | Accessible materials (.zip)
Michael Cai, Marco Del Negro, Edward Herbst, Ethan Matlin, Reca Sarfati, and Frank Schorfheide | This paper illustrates the usefulness of sequential Monte Carlo (SMC) methods in approximating DSGE model posterior distributions. We show how the tempering schedule can be chosen adaptively, document the accuracy and runtime benefits of generalized data tempering for "online" estimation (that is, re-estimating a model asnew data become available), and provide examples of multimodal posteriors that are well captured by SMC methods. We then use the online estimation of the DSGE model to compute pseudo-out-of-sample density forecasts and study the sensitivity ofthe predictive performance to changes in the prior distribution. We find that making priors less informative (compared to the benchmark priors used in the literature) by increasing the prior variance does not lead to a deterioration of forecast accuracy.
Sergio de Ferra and Enrico Mallucci | Should debtor countries support each other during sovereign debt crises? We answer this question through the lens of a two-country sovereign-default model that we calibrate to the euro-area periphery. First, we look at cross-country bailouts. We find that whenever agents anticipate their existence, bailouts induce moral hazard an reduce welfare. Second, we look at the borrowing choices of a global central borrower. We find that it borrows less than individual governments and, as such, defaults become less frequent and welfare increases. Finally, we show that central borrower's policies can be replicated in a decentralized setting with Pigouvian taxes on debt.
Jane Ihrig, Zeynep Senyuz, and Gretchen C. Weinbach | We describe the Federal Reserve's (the Fed's) approach to implementing monetary policy in an ample-reserves regime. We use a stylized model to explain the factors the Fed considers and the tools it uses to ensure interest rate control when the quantity of reserves is ample. Then, we take a close look at the Fed's experience operating in this regime in the post-crisis period, both as it has raised and lowered its policy rate. Looking ahead, we highlight some considerations relevant for maintaining a level of reserves consistent with the efficient and effective implementation of monetary policy, and conclude with an overview of the benefits of an ample-reserves regime. This primer is intended to enhance discussions and understanding of the Fed's actions and communications regarding monetary policy implementation, as many resources on this topic may be out of date given the recent evolution of the policy environment.
François de Soyres, Alen Mulabdic, Siobhan Murray, Nadia Rocha, and Michele Ruta | This paper studies the impact of transport infrastructure projects of the Belt and Road Initiative on shipment times and trade costs. Based on a new data on completed and planned Belt and Road transport projects, Geographic Information System analysis is used to estimate shipment times before and after the Belt and Road Initiative. Two sets of data are computed to address different research questions: a global database based on an analysis of 1,000 cities in 191 countries and 47 sectors and a regional database that focuses on more granular information (1,818 cities) for Belt and Road economies only. The paper uses sectoral estimates of “value of time” to transform changes in shipment times into changes in ad valorem trade costs at the country‐sector level. The findings show that the Belt and Road Initiative will significantly reduce shipment times and trade costs. For the world, the average reduction in shipment time will range between 1.2 and 2.5 percent, leading to reduction of aggregate trade costs between 1.1 and 2.2 percent. For Belt and Road economies, the change in shipment times and trade costs will range between 1.7 and 3.2 percent and 1.5 and 2.8 percent, respectively. Belt and Road economies located along the corridors where projects are built experience the largest gains. Shipment times along these corridors decline by up to 11.9 percent and trade costs by up to 10.2 percent.
Matteo Luciani | We use a dynamic factor model to disentangle changes in prices due to economy-wide (common) shocks, from changes in prices due to idiosyncratic shocks. Using 146 disaggregated individual price series from the U.S. PCE price index, we find that most of the fluctuations in core PCE prices observed since 2010 have been idiosyncratic in nature. Moreover, we find that common core inflation responds to economic slack, while the idiosyncratic component does not. That said, even after filtering out idiosyncratic factors, the estimated Phillips curve is extremely flat post-1995. Therefore, our results suggest that the flattening of the Phillips curve is the result of macroeconomic forces.
David M. Byrne and Carol A. Corrado | Consumer digital access services—internet, mobile phone, cable TV, and streaming—accounted for over 2 percent of U.S. household consumption in 2018. We construct prices for these services using direct measures of volume (data transmitted, talk time, and hours of programming). Our price index fell 12 percent per year from 1988 to 2018 while official prices moved up modestly. Using our digital services index, we estimate total personal consumption expenditure (PCE) prices have risen nearly 1/2 percentage point slower than the official index since 2008. Importantly, the spread between alternative and official PCE price inflation has increased noticeably over time.
Gara Afonso, Kyungmin Kim, Antoine Martin, Ed Nosal, Simon Potter, and Sam Schulhofer-Wohl | Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-09 financial crisis. We find that the optimal level of reserve supply likely lies somewhere between scarce and abundant reserves, thus highlighting the benefits of implementation with what could be called "ample" reserves. The Federal Reserve's announcement in October 2019 that it would maintain a level of reserve supply greater than the one that prevailed in early September is consistent with the implications of our framework.
Garth Baughman and Stanislav Rabinovich | Firms often make production decisions before meeting a buyer. We incorporate this often-overlooked fact into an otherwise standard monetary search model and show that it has important implications for the set of equilibria, efficiency, and the cost of inflation. Our model features a strategic complementarity between the buyers' ex ante choice of money balances and sellers' ex ante choice of productive capacity. When resale value of unsold inventories is high, sellers carry excess capacity and the equilibrium is unique. But, when resale value is low, there is a continuum of equilibria, all of which are inefficient and welfare-ranked. Effects of inflation are highly nonlinear. When inflation is high, the buyer's money holdings bind, and inflation therefore reduces trade through a standard real-balance channel. When inflation is low, the seller's capacity constraint binds, real balances have no effect at the margin, and inflation has no effect on output or welfare.
Adair Morse and Karen Pence | Technology has changed how discrimination manifests itself in financial services. Replacing human discretion with algorithms in decision-making roles reduces taste-based discrimination, and new modeling techniques have expanded access to financial services to households who were previously excluded from these markets. However, algorithms can exhibit bias from human involvement in the development process, and their opacity and complexity can facilitate statistical discrimination inconsistent with antidiscrimination laws in several aspects of financial services provision, including advertising, pricing, and credit-risk assessment. In this chapter, we provide a new amalgamation and analysis of these developments, identifying five gateways whereby technology induces discrimination to creep into financial services. We also consider how these technological changes in finance intersect with existing discrimination and data privacy laws, leading to our contribution of four fron tlines of regulation. Our analysis concludes that the net effect of innovation in technological finance on discrimination is ambiguous and depends on the future choices made by policymakers, the courts, and firms.
Raven Molloy, Christopher L. Smith, and Abigail Wozniak | We confront two seemingly-contradictory observations about the US labor market: the rate at which workers change employers has declined since the 1980s, yet there is a commonly expressed view that long-term employment relationships are more difficult to attain. We reconcile these observations by examining how the distribution of employment tenure has changed in aggregate and for various demographic groups. We show that the fraction of workers with short tenure (less than a year) has been falling since the 1980s, consistent with the decline in job changing. Meanwhile, the fraction of workers with long tenure (20 years or more) has been rising modestly owing to an increase in long tenure for women and the ageing of the population. Long tenure has declined markedly among older men; this trend may have spurred popular perceptions that long-term employment is less common than in the past. The decline in long-tenure for men appears due to an increase in mid-career separa tions that reduce the likelihood of reaching long-tenure, rather than an increase in late-career separations. Nevertheless, survey evidence indicates that these changes in employment relationships are not associated with heightened concerns about job insecurity or decreases in job satisfaction as reported by workers. The decline in short-tenure is widespread, associated with fewer workers cycling among briefly-held jobs, and coincides with an increase in perceived job security among short tenure workers.
Sergio Correia, Kevin F. Kiernan, Matthew P. Seay and Cindy M. Vojtech | This technical note describes the Forward-Looking Analysis of Risk Events (FLARE) model, which is a top-down model that helps assess how well the banking system is positioned to weather exogenous macroeconomic shocks. FLARE estimates banking system capital under varying macroeconomic scenarios, time horizons, and other systemic shocks.
Chunya Bu, John Rogers, and Wenbin Wu | Standard structural VAR models and estimation using Romer and Romer (2004) monetary policy shocks show that, in samples after the 1980s, a contractionary conventional monetary policy shock generates smaller and sometimes perversely-signed impulse responses compared to earlier samples. Using insights from the central bank information effects literature, we show that the analyses producing these results suffer from an omitted variables problem related to forward-looking information emanating from Federal Reserve forecasts. Transmission of conventional monetary policy shocks takes on the standard signs, and is typically significant, once Fed forward-looking information is taken into account. This reconciliation does not follow from adding private sector forecasts to the estimation frameworks.
David López-Salido and Francesca Loria | We investigate how macroeconomic drivers affect the predictive inflation distribution as well as the probability that inflation will run above or below certain thresholds over the near term. This is what we refer to as Inflation-at-Risk–a measure of the tail risks to the inflation outlook. We find that the recent muted response of the conditional mean of inflation to economic conditions does not convey an adequate representation of the overall pattern of inflation dynamics. Analyzing data from the 1970s reveals ample variability in the conditional predictive distribution of inflation that remains even when focusing on the post-2000 period of stable and low mean inflation. We also document that in the United States and in the Euro Area tight financial conditions carry substantial downside inflation risks, a feature overlooked by much of the literature. Our paper offers a new empirical perspective to existing macroeconomic models, showing that changes in credit conditions are also key to understand the dynamics of the inflation tails.
Richard V. Burkhauser, Kevin Corinth, James Elwell, and Jeff Larrimore | We evaluate progress in President's Johnson's War on Poverty. We do so relative to the scientifically arbitrary but policy relevant 20 percent baseline poverty rate he established for 1963. No existing poverty measure fully captures poverty reductions based on the standard that President Johnson set. To fill this gap, we develop a Full-income Poverty Measure with thresholds set to match the 1963 Official Poverty Rate. We include cash income, taxes, and major in-kind transfers and update poverty thresholds for inflation annually. While the Official Poverty Rate fell from 19.5 percent in 1963 to 12.3 percent in 2017, our Full-income Poverty Rate based on President Johnson's standards fell from 19.5 percent to 2.3 percent over that period. Today, almost all Americans have income above the inflation-adjusted thresholds established in the 1960s. Although expectations for minimum living standards evolve, this suggests substantial progress combatting absolute poverty since the War on Poverty began.
S. Boragan Aruoba, Pablo Cuba-Borda, Kenji Higa-Flores, Frank Schorfheide, and Sergio Villalvazo | We develop an algorithm to construct approximate decision rules that are piecewise-linear and continuous for DSGE models with an occasionally binding constraint. The functional form of the decision rules allows us to derive a conditionally optimal particle filter (COPF) for the evaluation of the likelihood function that exploits the structure of the solution. We document the accuracy of the likelihood approximation and embed it into a particle Markov chain Monte Carlo algorithm to conduct Bayesian estimation. Compared with a standard bootstrap particle filter, the COPF significantly reduces the persistence of the Markov chain, improves the accuracy of Monte Carlo approximations of posterior moments, and drastically speeds up computations. We use the techniques to estimate a small-scale DSGE model to assess the effects of the government spending portion of the American Recovery and Reinvestment Act in 2009 when interest rates reached the zero lower bound.
Nathan Converse, Eduardo Levy-Yeyati, and Tomas Williams | This paper examines how the growth of exchange-traded funds (ETFs) has affected the sensitivity of international capital flows to global financial conditions. Using data on individual emerging market funds worldwide, we employ a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. We find that the sensitivity of flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. We then show that our findings have macroeconomic implications. In countries where ETFs hold a larger share of the equity market, total cross-border equity flows and returns are significantly more sensitive to global financial conditions. Our results imply that the increasing role of ETFs as a channel for international capital flows has amplified the global financial cycle in emerging markets.
Francesco Ferrante and Matthias Paustian | We develop an incomplete-markets heterogeneous agent New-Keynesian (HANK) model in which households are allowed to lend and borrow, subject to a borrowing constraint. We show that, in this framework, forward guidance, that is the promise by the central bank to lower future interest rates, can be a powerful policy tool, especially when the economy is in a liquidity trap. In our model, the power of forward guidance is amplified by three redistributive channels, absent in a representative agent new- Keynesian model (RANK) or in a HANK model without private debt. First, expected lower rates imply a future transfer of wealth from savers to borrowers, reducing precautionary motives and stimulating current demand and inflation. Second, higher initial inflation lowers the path of the real rate increasing the wealth of borrowers, who have a higher marginal propensity to consume (MPC). Third, if debt is nominal, debt deflation generates also a wealth transfer towards high-MPC borrowing-constrained agents, further increasing aggregate consumption and inflation. These channels amplify each other in a liquidity trap, and can make forward guidance more powerful in a HANK model than in a RANK framework. These results contrast with previous research on HANK models, which focused on frameworks where agents were not allowed to borrow, and which found negligible effects of forward guidance.
François de Soyres and Alexandre Gaillard | What is the relationship between international trade and business cycle synchronization? Using data from 40 countries, we find that GDP comovement is significantly associated with trade in intermediate inputs but not with trade in final goods. Motivated by this new fact, we build a model of international trade that is able to replicate the empirical trade-comovement slope, offering the first quantitative solution for the Trade Comovement Puzzle. The model relies on (i) global value chains, (ii) price distortions due to monopolistic competition and (iii) fluctuations in the mass of firms serving each country. The combination of these ingredients creates a link between domestic measured productivity and foreign shocks through trade linkages, generating a disconnect between technology and measured productivity. Finally, we provide empirical evidence for the importance of these elements in generating a link between foreign shocks and domestic GDP.
Emily Liu, Friederike Niepmann, and Tim Schmidt-Eisenlohr | This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
Joaquin Garcia-Cabo and Rocio Madera | This paper studies selection into and returns to self-employment in labor markets with stringent employment protection. Using Spanish administrative panel data, we characterize self-employment dynamics in the presence of rigidities that affect workers’ outside options. We document the negative selection into self-employment when workers enter from unemployment, and the pro-cyclicality of the decision. We identify career heterogeneity in the data and estimate a rich life-cycle income process. The self-employed face shocks with smaller variances but lower returns compared to fixed-term workers—the prevalent contract out of unemployment. These facts call for a revision of active labor market policies in place.
Andrea De Michelis, Thiago R. T. Ferreira, and Matteo Iacoviello | We study the effects of oil prices on consumption across countries and U.S. states, by exploiting the time-series and cross-sectional variation in oil dependency of these economies. We build two large datasets: one with 55 countries over the years 1975-2018, and another with all U.S. states over the period 1989-2018. We then show that oil price declines generate positive effects on consumption in oil-importing economies, while depressing consumption in oil-exporting economies. We also document that oil price increases do more harm than the good afforded by oil price decreases both in the world and U.S. aggregates.
Ricardo Correa and Laurie P. DeMarco | In line with a growing literature on financial intermediary asset pricing, we find that changes in the leverage of primary dealers have predictive power in forecasting exchange rates. Unlike previous studies, we find that primary dealer heterogeneity matters for their role in asset pricing. The leverage of foreign-headquartered dealers in the United States entirely drive the predictive power on exchange rates, while the same measure for domestic U.S.-headquartered dealers is insignificant. The leverage of foreign-headquartered dealers also has more predictive power for some other assets. We argue that this heterogeneity is due to foreign broker-dealers having more balance sheet capacity relative to domestic dealers during the 2000s. This result conflicts with an assumption of homogeneity among intermediaries which is implicit in most modern intermediary asset pricing models. In addition, we find that currency market positions, including derivatives positions, are likely stronger than cross-border lending as the main channel through which leverage manifests itself in exchange rate changes.
The Securities Industry and Financial Markets Association (SIFMA) recommends a market close on Friday, April 10, 2020, which will be widely treated as a holiday in the repo market. As a result, there will be no publication of the Tri-Party General Collateral Rate ,the Broad General Collateral Rate, the Secured Overnight Financing Rate, or the SOFR Averages and Index on that day.
The New York Fed has released a set of Frequently Asked Questions to address programmatic inquiries about the facility.
The New York Fed today announced the appointment of five new members to its Community Advisory Group (CAG), effective immediately.
Effective March 23, 2020, the Federal Open Market Committee directed the Open Market Trading Desk at the Federal Reserve Bank of New York to increase the System Open Market Account (SOMA) holdings of Treasury securities and agency mortgage-backed securities in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS.
The New York Fed today released a resource hub with curated information for business owners, employees, nonprofit, and community organizations impacted by the coronavirus, or COVID-19.
In accordance with the most recent FOMC directive, the Open Market Trading Desk at the Federal Reserve Bank of New York has updated the current bi-weekly schedule of agency MBS purchase operations.
Effective March 16, 2020, the Federal Open Market Committee directed the Open Market Trading Desk to increase over coming months the System Open Market Account holdings of Treasury securities and agency mortgage-backed securities by at least $500 billion and at least $200 billion, respectively.
The New York Fed’s Center for Microeconomic Data released the February 2020 Survey of Consumer Expectations.
The Federal Reserve Bank of New York today announced the formation of the Second District Advisory Council (SDAC or Council), a private-sector group sponsored by the New York Fed.
The New York Fed's Center for Microeconomic Data today released the December 2019 Survey of Consumer Expectations (SCE) Household Spending Survey.
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