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Spillovers and Spillbacks
Acharya, Sushant; Pesenti, Paolo (2024-03-01)
We study international monetary policy spillovers and spillbacks in a tractable two-country Heterogeneous Agent New Keynesian model. Relative to Representative Agent (RANK) models, our framework introduces a precautionary-savings channel, as households in both countries face uninsurable income risk, and a real-income channel, as households have heterogeneous marginal propensities to consume (MPC). While both channels amplify the size of spillovers/spillbacks, only precautionary savings can change their sign relative to RANK. Spillovers are likely to be larger in economies with higher ...
Staff Reports , Paper 1089

Working Paper
Heterogeneous bank lending responses to monetary policy: new evidence from a real-time identification
Bowdler, Christopher; Bluedorn, John C.; Koch, Christoffer (2014-03-01)
We present new evidence on how heterogeneity in banks interacts with monetary policy changes to impact bank lending, at both the bank and U.S. state levels. Using an exogenous policy measure identified from narratives on FOMC intentions and real-time economic forecasts, we find much stronger dynamic effects and greater heterogeneity in U.S. bank lending responses than that found in previous research based on realized federal funds rate changes. Our findings suggest that studies using realized monetary policy changes confound monetary policy?s effects with those of changes in expected ...
Working Papers , Paper 1404

Working Paper
A Price-Differentiation Model of the Interbank Market and Its Application to a Financial Crisis
Kim, Kyungmin (2017-06-16)
Rate curves for overnight loans between bank pairs, as functions of loan values, can be used to infer valuation of reserves by banks. The inferred valuation can be used to interpret shifts in rate curves between bank pairs, for example, in response to a financial crisis. This paper proposes a model of lending by a small bank to a large monopolistic bank to generate a tractable rate curve. An explicit calibration procedure for model parameters is developed and applied to a dataset from Mexico around the 2008 financial crisis. During the crisis, relatively small banks were lending to large ...
Finance and Economics Discussion Series , Paper 2017-065

Working Paper
Measuring capital adequacy supervisory stress tests in a Basel world
Wall, Larry D. (2013-12-01)
The United States is now committed to using two relatively sophisticated approaches to measuring capital adequacy: Basel III and stress tests. This paper shows how stress testing could mitigate weaknesses in the way Basel III measures credit and interest rate risk, the way it measures bank capital, and the way it creates countercyclical capital buffers. However, this paper also emphasizes the extent to which stress tests add value will depend upon the exercise of supervisor discretion in the design of stress scenarios. Whether supervisors will use this discretion more effectively than they ...
FRB Atlanta Working Paper , Paper 2013-15

Working Paper
Wealth Effects, Price Markups, and the Neo-Fisherian Hypothesis
Hajdini, Ina; Airaudo, Marco (2021-11-17)
By introducing Jaimovich-Rebelo (JR) consumption-labor nonseparable preferences into an otherwise standard New Keynesian model, we show that the occurrence of positive comovement between inflation and the nominal interest rate conditional on a nominal shock - the so-called neo-Fisherian hypothesis - depends on the extent of wealth effects in households’ labor supply decisions. Neo-Fisherianism appears more prominent in economic environments with i) weaker wealth effects on labor supply (in particular for Greenwood-Hercowitz-Huffmann preferences where wealth effects are absent), and ii) ...
Working Papers , Paper 21-27

Working Paper
Mis-specified Forecasts and Myopia in an Estimated New Keynesian Model
Hajdini, Ina (2022-02-16)
The paper considers a New Keynesian framework in which agents form expectations based on a combination of mis-specified forecasts and myopia. The proposed expectations formation process is found to be consistent with all three empirical facts on consensus inflation forecasts, namely, that forecasters under-react to ex-ante forecast revisions, that forecasters over-react to recent events, and that the response of forecast errors to a shock initially under-shoots but then over-shoots. The paper then derives the general equilibrium solution consistent with the proposed expectations formation ...
Working Papers , Paper 22-03

Working Paper
Foreign Exchange Reserves as a Tool for Capital Account Management
Fujiwara, Ippei; Davis, J. Scott; Wang, Jiao; Huang, Kevin X. D. (2019-02-05)
Many recent theoretical papers have argued that countries can insulate themselves from volatile world capital flows by using a variable tax on foreign capital as an instrument of monetary policy. But at the same time many empirical papers have argued that only rarely do we observe these cyclical capital taxes used in practice. In this paper we construct a small open economy model where the central bank can engage in sterilized foreign exchange intervention. When private agents can freely buy and sell foreign bonds, sterilized foreign exchange intervention has no effect. But we analytically ...
Globalization Institute Working Papers , Paper 352

Working Paper
Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength
Faccini, Renato; Melosi, Leonardo; Bianchi, Francesco (2020-05-11)
The Covid-19 pandemic found policymakers facing constraints on their ability to react to an exceptionally large negative shock. The current low interest rate environment limits the tools the central bank can use to stabilize the economy, while the large public debt curtails the efficacy of fiscal interventions by inducing expectations of costly fiscal adjustments. Against this background, we study the implications of a coordinated fiscal and monetary strategy aimed at creating a controlled rise of inflation to wear away a targeted fraction of debt. Under this coordinated strategy, the fiscal ...
Working Paper Series , Paper WP 2020-13

Working Paper
A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity
Wong, Russell; Rocheteau, Guillaume; Weill, Pierre-Olivier (2017-04-20)
We construct a continuous-time, New-Monetarist economy with general preferences that displays an endogenous, non-degenerate distribution of money holdings. Properties of equilibria are obtained analytically and equilibria are solved in closed form in a variety of cases. We study policy as incentive-compatible transfers financed with money creation. Lump-sum transfers are welfare-enhancing when labor productivity is low, but regressive transfers achieve higher welfare when labor productivity is high. We introduce illiquid government bonds and draw implications for the existence of ...
Working Paper , Paper 17-6

Speech
Testimony on improving financial institution supervision: examining and addressing regulatory capture
Dudley, William (2014-11-25)
Testimony before the Senate Committee on Banking, Housing, and Urban Affairs Financial Institutions and Consumer Protection Subcommittee.
Speech , Paper 152

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