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Working Paper
Macroprudential Policy: Case Study from a Tabletop Exercise
Since the global financial crisis of 2007-09, policy makers and academics around the world have advocated the use of prudential tools for macroprudential purposes. This paper presents a macroprudential tabletop exercise that aimed at confronting Federal Reserve Bank presidents with a plausible, albeit hypothetical, macro-financial scenario that would lend itself to macroprudential considerations. In the tabletop exercise, the primary macroprudential objective was to reduce the likelihood and severity of possible future financial disruptions associated with the hypothetical overheating ...
Working Paper
Scenario Synthesis and Macroeconomic Risk
We introduce methodology to bridge scenario analysis and model-based risk forecasting, leveraging their respective strengths in policy settings. Our Bayesian framework addresses the fundamental challenge of reconciling judgmental narrative approaches with statistical forecasting. Analysis evaluates explicit measures of concordance of scenarios with a reference forecasting model, delivers Bayesian predictive synthesis of the scenarios to best match that reference, and addresses scenario set incompleteness. This underlies systematic evaluation and integration of risks from different scenarios, ...
Working Paper
Risks and Uncertainty in Monetary Policy
Central banks monitor macroeconomic risk through two traditions: scenario analysis, regularly used since the mid-1990s, and distributional forecasting, practiced since the late 1960s. The two are complementary but separate: scenarios provide narratives without probabilities, while predictive distributions provide probabilities with limited economic interpretation. Treating baseline forecasts and scenarios as conditional predictive densities, and distributional forecasts as reference predictive distributions, places both within a common framework and clarifies their roles. The Scenario ...
Working Paper
Financial stability monitoring
While the Dodd Frank Act (DFA) broadens the regulatory reach to reduce systemic risks to the U.S. financial system, it does not address some important risks that could migrate to or emanate from entities outside the federal safety net. At the same time, it limits the types of interventions by financial authorities to address systemic events when they occur. As a result, a broad and forward-looking monitoring program, which seeks to identify financial vulnerabilities and guide the development of pre-emptive policies to help mitigate them, is essential. Systemic vulnerabilities arise from ...
Discussion Paper
Financial Stability Monitoring
In a recently released New York Fed staff report, we present a forward-looking monitoring program to identify and track time-varying sources of systemic risk.
Discussion Paper
Dealer Balance Sheet Capacity and Market Liquidity during the 2013 Selloff in Fixed Income Markets
Long-term interest rates hit record-low levels in 2012 but have since increased substantially.
Conference Paper
Financial intermediaries, financial stability and monetary policy
Journal Article
Measuring risk in the hedge fund sector
Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998. A comparison of the current rise in correlations with the elevation before the 1998 event, however, reveals a key difference. The current increase stems mainly from a decline in the volatility of returns, while the earlier rise was driven by high covariances - an alternative measure of comovement in dollar terms. Because volatility and covariances are lower today, the current hedge fund environment differs from the 1998 environment.>
Journal Article
The Federal Reserve's Primary Dealer Credit Facility
As liquidity conditions in the "repo market"--the market where broker-dealers obtain financing for their securities--deteriorated following the near-bankruptcy of Bear Stearns in March 2008, the Federal Reserve took the step of creating a special facility to provide overnight loans to dealers that have a trading relationship with the Federal Reserve Bank of New York. Six months later, in the wake of new strains in the repo market, the Fed expanded the facility by broadening the types of collateral accepted for loans. Both initiatives were designed to help restore the orderly functioning ...