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Report
A Leverage-Based Measure of Financial Instability
The size and the leverage of financial market investors and the elasticity of demand of unlevered investors define MinMaSS, the smallest market size that can support a given degree of leverage. The financial system’s potential for financial crises can be measured by the stability ratio, the fraction of total market size to MinMaSS. We use that financial stability metric to gauge the buildup of vulnerability in the run-up to the 1998 Long-Term Capital Management crisis and argue that policymakers could have detected the potential for the crisis.
Discussion Paper
The European Debt Crisis and the Dollar Funding Gap
Against the backdrop of the ongoing debt crisis in Europe, the difficulties faced by European banks in borrowing U.S. dollars have attracted increased attention. The inability to borrow dollars has been partially responsible for European banks? decisions to sell dollar-denominated assets and reduce their lending activity in the United States, to the possible detriment of U.S. companies and global financial markets. In this post, we discuss the genesis of European banks? dollar funding gap problem and the steps taken by central banks to help fill this gap. While we focus on European banks in ...
Report
Estimating the impacts of U.S. LSAPs on emerging market economies’ local currency bond markets
This paper examines whether large-scale asset purchases (LSAPs) by the Federal Reserve influenced capital flows out of the United States and into emerging market economies (EMEs) and also analyzes the degree of pass-through from long-term U.S. government bond yields to long-term EME bond yields. Using panel data from a broad array of EMEs, our empirical estimates suggest that a 10-basis-point reduction in long-term U.S. Treasury yields results in a 0.4-percentage-point increase in the foreign ownership share of emerging market debt. This, in turn, is estimated to reduce government bond yields ...
Report
Accounting for breakout in Britain: The Industrial Revolution through a Malthusian lens
This paper develops a simple dynamic model to examine the breakout from a Malthusian economy to a modern growth regime. It identifies several factors that determine the fastest rate at which the population can grow without engendering declining living standards; this is termed maximum sustainable population growth. We then apply the framework to Britain and find a dramatic increase in sustainable population growth at the time of the Industrial Revolution, well before the beginning of modern levels of income growth. The main contributions to the British breakout were technological improvements ...