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Working Paper
Black Swans and Financial Stability: A Framework for Building Resilience
Schreft, Stacey L.; Barth, Daniel (2025-06-06)
This article refines the concept of black swans, typically described as highly unlikely and catastrophic events, by clearly distinguishing between knowable and unknowable events. By emphasizing that black swans are “unknown unknowns,” the article highlights that the realization of new black swans cannot be prevented and motivates a need for policies that build the financial system's resilience to unforeseeable crises. The article introduces a "resilience principle" that calls for policies that are adaptable, universal, and systemic. Examples are provided of policies with these features, ...
Finance and Economics Discussion Series , Paper 2025-043

Working Paper
Changing Jobs to Fight Inflation: Labor Market Reactions to Inflationary Shocks
Koru, Omer; Bostanci, Gorkem; Villalvazo, Sergio (2025-06-04)
We argue that inflationary shocks affect allocative efficiency by changing the rate and the characteristics of workers’ job-to-job transitions. First, using monetary policy shocks and survey data on search effort, we empirically show that a one percentage point rise in inflation increases job-to-job transitions by up to 4.5%, and workers with higher inflation expectations are more likely to search and do so more effectively. Second, we build a general equilibrium model of directed on-the-job search to quantify the aggregate implications of labor market reactions. Higher-than-expected ...
Finance and Economics Discussion Series , Paper 2025-042

Working Paper
Place-Based Labor Market Inequality
Troland, Erin; Webber, Douglas A.; Liu, Jessica; Agnes, Isabella (2025-06-02)
This paper presents an overview of how various labor market indicators differ across geography. While many indicators are often discussed in terms of national aggregates, such discussions obscure the large degree of variation that exists across localities. We primarily use counties as a geographic unit, and document both structural differences that persist over time as well as differences in the past two business cycles. The racial composition of communities plays a large role in explaining geographic differences in labor market indicators, in some cases even more so than income. We ...
Finance and Economics Discussion Series , Paper 2025-040

Working Paper
Suitability of a County-Level Income Definition for Analysis of Lower-Income Communities
Merchant, Zofsha; Tran, Michelle; Tranfaglia, Anna; Troland, Erin; Dries, Ellie; Webber, Douglas A.; Liu, Jessica; Agnes, Isabella; Shaalan, Fatimah (2025-06-02)
This paper examines the costs and benefits of using a straightforward county-level income definition in the classification and study of lower-income communities. A definition based on population-weighted distribution of county-level median household incomes does a good job of identifying the most economically disadvantaged communities across a wide range of indicators. We show robustness to the use of different thresholds, levels of geography, and cost-of-living adjustments.
Finance and Economics Discussion Series , Paper 2025-039

Working Paper
How Stable are Inflation Expectations in the Euro Area? Evidence from the Euro-Area Financial Markets
Moraux, Franck; Grishchenko, Olesya V.; Pakulyak, Olga (2025-06-02)
We analyze evolution of inflation expectations in the euro area (EA) using a novel measure of inflation expectations implied by the French nominal and inflation-indexed bonds. Overall, we find that EA inflation expectations have been relatively well anchored in the 2004 -- 2019 sample but have been somewhat sensitive to the incoming macroeconomic news and monetary policy shocks in the sample that includes the COVID-19 pandemic. Our results are robust with respect to the use of different inflation-indexed securities data, such as the EA inflation-linked swaps.
Finance and Economics Discussion Series , Paper 2025-041

Working Paper
Market Liquidity in Treasury Futures Market During March 2020
Tuzun, Tugkan; Mixon, Scott; Gousgounis, Eleni; Vega, Clara (2025-05-30)
We study the behavior of liquidity providers and liquidity consumers in the 10-year U.S. Treasury futures market during the height of the COVID-19 shock in March 2020, a period of market turmoil when demand for liquidity was high. In March 2020, PTFs reduced their volume of liquidity providing trades as a share of total trading volume. However, they still accounted for the lion share of total liquidity provision and their liquidity provision improved market liquidity. In contrast, dealers (banks and non-banks) increased their volume of liquidity providing trades as a share of total trading ...
Finance and Economics Discussion Series , Paper 2025-038

Working Paper
A Look Back at "Look Through"
Nelson, Edward (2025-05-29)
This paper examines the place that a "look-through" approach to price shocks has acquired in inflation-targeting frameworks. The "look-through" approach reflects the fact that, in the event of a shock that is likely (on impact) to put a sizable share of consumer prices under upward pressure, one option available to the central bank is to accommodate the initial price rise. In doing so, it can also attempt to ensure that future inflation rates, and inflation expectations, are insulated from the shock. Although the policy of "looking through" has achieved considerable acceptance, its origins ...
Finance and Economics Discussion Series , Paper 2025-037

Working Paper
Collateral Reuse and Financial Stability
Chang, Jin-Wook; Chuan, Grace (2025-05-20)
The isolated effects of collateral reuse on financial stability are ambiguous and understudied. While greater collateral reuse can guarantee more payments with fewer assets, it can also increase the exposure to potential drops in collateral price. To analyze these tradeoffs, we develop a financial network model with endogenous asset pricing, multiple equilibria, and equilibrium selection. We find that more collateral reuse decreases the likelihood of the worst equilibrium (crisis), with varying effects depending on the network structure. Therefore, collateral reuse can unambiguously improve ...
Finance and Economics Discussion Series , Paper 2025-035

Working Paper
Scenario Synthesis and Macroeconomic Risk
Luciani, Matteo; Adrian, Tobias; Giannone, Domenico; West, Mike (2025-05-20)
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, ...
Finance and Economics Discussion Series , Paper 2025-036

Working Paper
Risk-averse Dealers in a Risk-free Market - The Role of Trading Desk Risk Limits
Tian, Mary; Petrasek, Lubomir; Li, Dan (2025-05-15)
Self-imposed risk limits effectively limit dealers' appetite for risks and their capacity to intermediate in Treasury markets in times of market stress. Using granular and high frequency regulatory data on US dealers' Treasury securities trading desk positions and desk-level Value-at-Risk limits, we show that dealers are more inclined to reduce their positions as they get closer to their internal risk limit, consistent with such limit being meaningful and costly for traders to breach. Dealers actively manage their inventories away from their limits by selling longer-term securities and ...
Finance and Economics Discussion Series , Paper 2025-034

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