Search Results
Newsletter
Financial market utilities and the challenge of just-in-time liquidity
Financial market utilities ensure that clearing, settlement, and payments operations go smoothly. This article explores how these systems mitigate settlement risk, using precisely targeted ?just-in-time? liquidity, and discusses the risks for financial stability implied by the increasing role of just-in-time liquidity in our financial markets.
Newsletter
Explaining the decline in the auction rate securities market
Auction rate securities are an example of a relatively obscure financial market instrument that has been caught up in the recent negative sentiment affecting the financial markets. This article examines these securities and sheds some light on recent events.
Working Paper
Monetary policy and the term structure of nominal interest rates: evidence and theory
This paper explores how exogenous impulses to monetary policy affect the yield curve for nominally risk-free bonds. We identify monetary policy shocks using three distinct variants of the identified VAR methodology. All three approaches imply similar patterns for the effect of monetary policy shocks on the term structure: A contractionary policy shock induces a pronounced positive but short-lived response in short term interest rates, with a smaller effect on medium-term rates and almost no effect on long term rates. Because of their transitory impact, monetary policy shocks account for a ...
Working Paper
Bank capital regulation with and without state-contingent penalties
A moral hazard model with exogenous bank franchise value is used to analyze bank capital regulation. Banks choose their capital structure as well as the riskiness and mean of their portfolio. The portfolio mean is determined by the level of costly screening. Screening and portfolio risk are private information, so there are two dimensions to the moral hazard problem. Deposit insurance gives banks an incentive to hold less capital, and to choose a higher-risk, lower-mean portfolio. To mitigate these incentives, capital requirements with and without ex post fines are studied. We find an ...
Working Paper
\"Peso problem\" explanations for term structure anomalies
We examine the empirical evidence on the expectation hypothesis of the term structure of interest rates in the United States, the United Kingdom, and Germany using the Campbell-Shiller (1991) regressions and a vector-autoregressive methodology. We argue that anomalies in the U.S. term structure, documented by Campbell and Shiller (1991), may be due to a generalized peso problem in which a high-interest rate regime occurred less frequently in the sample of U.S. data than was rationally anticipated. We formalize this idea as a regime-switching model of short-term interest rates estimated with ...
Journal Article
The crisis of 1998 and the role of the central bank
Following the Russian default and devaluation in August 1998, financial markets were characterized by a withdrawal of liquidity, a flight to the safest assets, increased concerns about credit quality, and large declines in asset values. However, the crisis ended following a rather modest interest rate cut by the Federal Reserve. Why did the central bank's action have this effect? This article argues that the crisis was an episode of potential coordination failure, triggered by, but distinct from, the events in Russia. The Federal Reserve's action signaled a policy change that serve to ...
Newsletter
Whither the stock market?