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Working Paper
A Shadow Rate or a Quadratic Policy Rule? The Best Way to Enforce the Zero Lower Bound in the United States
We study whether it is better to enforce the zero lower bound (ZLB) in models of U.S. Treasury yields using a shadow rate model or a quadratic term structure model. We show that the models achieve a similar in-sample fit and perform comparably in matching conditional expectations of future yields. However, when the recent ZLB period is included in the sample, the models ' ability to match conditional expectations away from the ZLB deteriorates because the time-series{{p}}dynamics of the pricing factors change. In addition, neither model provides a reasonable description of conditional ...
Discussion Paper
The Treasury Market Flash Event of February 25, 2021
The Treasury market flash event of February 25, 2021 underscores the pivotal role of high-speed liquidity provision in the most liquid electronic parts of the Treasury market. We find evidence that the sharp drop in prices that day was accompanied by a sudden drop in market depth and a brief deterioration in high-speed liquidity provision amid elevated transaction volumes, albeit to a much lesser extent than during the episode of severe illiquidity in March 2020. Similar to some previous episodes accompanied by moderately elevated economic and financial market uncertainty, market depth has ...
Working Paper
The Relationship between Market Depth and Liquidity Fragility in the Treasury Market
Analysis of market liquidity often focuses on measures of the current cost of trading. However, investors and policy-makers also care about what would happen to liquidity in the event of an adverse shock. If liquidity were to deteriorate rapidly at times when investors were seeking to rebalance portfolios, this could amplify the effects of shocks to the financial system even if liquidity is high most of the time. We examine the potential for such fragility of liquidity in the Treasury market. We show that a reduction in the availability of resting orders to trade ("market depth") increases ...
Working Paper
High-Frequency Estimates of the Natural Real Rate and Inflation Expectations
We propose a new method of estimating the natural real rate and long-horizon inflation expectations, using nonlinear regressions of survey-based measures of short-term nominal interest rates and inflation expectations on U.S. Treasury yields. We find that the natural real rate was relatively stable during the 1990s and early 2000s, but declined steadily after the global financial crisis, before dropping more sharply to around 0 percent during the recent COVID-19 pandemic. Long-horizon inflation expectations declined steadily during the 1990s and have since been relatively stable at close to 2 ...