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Author:Skeie, David R. 

Report
Payment networks in a search model of money

In a simple search model of money, we study a special kind of memory that gives rise to an arrangement resembling a payment network. Specifically, we assume that agents can pay a cost to access a central database that tracks payments made and received. Incentives must be provided to agents to access the central database and to produce when they participate in this arrangement. We also study policies that can loosen these incentive constraints. In particular, we show that a "no-surcharge" rule has good incentive properties. Finally, we compare our model with that of Cavalcanti and Wallace.
Staff Reports , Paper 263

Report
A sampling-window approach to transactions-based Libor fixing

We examine the properties of a method for fixing Libor rates that is based on transactions data and multi-day sampling windows. The use of a sampling window may mitigate problems caused by thin transaction volumes in unsecured wholesale term funding markets. Using two partial data sets of loan transactions, we estimate how the use of different sampling windows could affect the statistical properties of Libor fixings at various maturities. Our methodology, which is based on a multiplicative estimate of sampling noise that avoids the need for interest rate data, uses only the timing and sizes ...
Staff Reports , Paper 596

Report
Vesting and control in venture capital contracts

Vesting of equity payments to an entrepreneur, which is a form of time-contingent compensation, is very common in venture capital contracts. Empirical research suggests that vesting is used to help overcome asymmetric information and agency problems. We show in a theoretical model that vesting equity to an entrepreneur over a long period of time acts as a screening device against a bad entrepreneur type. But incomplete contracts due to hold-up by the venture capitalist imply that equity compensation, in the form of either short-term or long-term vesting, cannot provide standard contractible ...
Staff Reports , Paper 297

Report
Identifying term interbank loans from Fedwire payments data

Interbank markets for term maturities experienced great stress during the 2007-09 financial crisis, as illustrated by the behavior of the one- and three-month Libor. Despite widespread interest in these markets, little data is available on dollar interbank lending for maturities beyond overnight. We develop a methodology to infer information about individual term dollar interbank loans settled through the Fedwire Funds Service, the large-value bank payment system operated by the Federal Reserve Banks. We find a sharp increase in the dispersion of inferred term interbank interest rates, a ...
Staff Reports , Paper 603

Discussion Paper
Explaining the Puzzling Behavior of Short-Term Money Market Rates

Since 2008, the Federal Reserve has dramatically increased the supply of bank reserves, effectively adopting a floor system for monetary policy implementation. Since then, the behavior of short-term money market rates has been at times puzzling. In particular, short-term rates have been surprisingly firm in recent months, despite the large increase in reserves by the Fed as a part of its response to the coronavirus pandemic. In this post, we provide evidence that both the supply of reserves and the supply of short-term Treasury securities are important factors for explaining short-term rates.
Liberty Street Economics , Paper 20200824

Report
A model of liquidity hoarding and term premia in inter-bank markets

Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank loans, reflected in the one-month and three-month Libor. We explain such stress by modeling leveraged banks? precautionary demand for liquidity. Asset shocks impair a bank?s ability to roll over debt because of agency problems associated with high leverage. In turn, banks hoard liquidity and decrease term lending as their rollover risk increases over the term of the loan. High levels of short-term leverage and illiquidity of assets lead to low volumes and high rates for term borrowing. In ...
Staff Reports , Paper 498

Report
Banking with nominal deposits and inside money

In the literature, bank runs take the form of withdrawals of real demand deposits that deplete a fixed reserve of goods in the banking system. This framework describes the type of bank run that has occurred historically in the United States and more recently in developing countries. However, in a modern banking system, large withdrawals take the form of electronic payments of inside money, with no analog of a depletion of a scarce reserve from the banking system. In a new framework of nominal demand deposits repayable in inside money, pure liquidity-driven bank runs do not occur. If there ...
Staff Reports , Paper 242

Report
A note on bank lending in times of large bank reserves

The amount of reserves held by the U.S. banking system reached $1.5 trillion in April 2011. Some economists argue that such a large quantity of bank reserves could lead to overly expansive bank lending as the economy recovers, regardless of the Federal Reserve?s interest rate policy. In contrast, we show that the size of bank reserves has no effect on bank lending in a frictionless model of the current banking system, in which interest is paid on reserves and there are no binding reserve requirements. We also examine the potential for balance-sheet cost frictions to distort banks? lending ...
Staff Reports , Paper 497

Report
Repo runs

The recent financial crisis has shown that short-term collateralized borrowing may be highly unstable in times of stress. The present paper develops a dynamic equilibrium model and shows that this instability can be a consequence of market-wide changes in expectations, but does not have to be. We derive a liquidity constraint and a collateral constraint that determine whether such expectations-driven runs are possible and show that they depend crucially on the microstructure of particular funding markets that we examine in detail. In particular, our model provides insights into the ...
Staff Reports , Paper 444

Discussion Paper
Crisis Chronicles: The Hamburg Crisis of 1799 and How Extreme Winter Weather Still Disrupts the Economy

With intermittent war raging across much of Western Europe near the end of the eighteenth century, by about 1795, Hamburg had replaced Amsterdam as an important hub for commodities trade. And from 1795 to 1799, Hamburg boomed. Prices for goods increased, the harbor was full, and warehouses were bulging. But when a harsh winter iced over the harbor, excess demand and speculation drove up prices. By spring, demand proved lower than supply, and prices started falling, credit tightened, and the decline in prices accelerated. So when a ship bound for Hamburg laden with gold sunk off the coast, an ...
Liberty Street Economics , Paper 20140808

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