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Working Paper
Mapping Heat in the U.S. Financial System
Palumbo, Michael G.; Lee, Seung Jung; Warusawitharana, Missaka; Aikman, David; Kiley, Michael T. (2015-06-24)
We provide a framework for assessing the build-up of vulnerabilities in the U.S. financial system. We collect forty-four indicators of financial and balance-sheet conditions, cutting across measures of valuation pressures, nonfinancial borrowing, and financial-sector health. We place the data in economic categories, track their evolution, and develop an algorithmic approach to monitoring vulnerabilities that can complement the more judgmental approach of most official-sector organizations. Our approach picks up rising imbalances in the U.S. financial system through the mid-2000s, presaging ...
Finance and Economics Discussion Series , Paper 2015-59

Working Paper
Firm Entry and Employment Dynamics in the Great Recession
Siemer, Michael (2014-07-30)
The 2007-2009 recession is characterized by: a large drop in employment, an unprecedented decline in firm entry, and a slow recovery. Using confidential firm-level data, I show that financial constraints reduced employment growth in small relative to large firms by 4.8 to 10.5 percentage points. The effect of financial constraints is robust to controlling for aggregate demand and is particularly strong in small young firms. I show in a heterogeneous firms model with endogenous firm entry and financial constraints that a large financial shock results in a long-lasting recession caused by a ...
Finance and Economics Discussion Series , Paper 2014-56

Working Paper
The Tradeoffs in Leaning Against the Wind
Gourio, Francois; Sim, Jae W.; Kashyap, Anil K. (2017-08-01)
Credit booms sometimes lead to financial crises which are accompanied with severe and persistent economic slumps. Does this imply that monetary policy should ?lean against the wind? and counteract excess credit growth, even at the cost of higher output and inflation volatility? We study this issue quantitatively in a standard small New Keynesian dynamic stochastic general equilibrium model which includes a risk of financial crisis that depends on ?excess credit?. We compare monetary policy rules that respond to the output gap with rules that respond to excess credit. We find that leaning ...
Working Paper Series , Paper WP-2017-21

Report
Stressed, not frozen: the Federal Funds market in the financial crisis
Schoar, Antoinette; Afonso, Gara; Kovner, Anna (2010-03-01)
We examine the importance of liquidity hoarding and counterparty risk in the U.S. overnight interbank market during the financial crisis of 2008. Our findings suggest that counterparty risk plays a larger role than does liquidity hoarding: the day after Lehman Brothers? bankruptcy, loan terms become more sensitive to borrower characteristics. In particular, poorly performing large banks see an increase in spreads of 25 basis points, but are borrowing 1 percent less, on average. Worse performing banks do not hoard liquidity. While the interbank market does not freeze entirely, it does not seem ...
Staff Reports , Paper 437

Working Paper
Interconnectedness in the Interbank Market
Brunetti, Celso; Harris, Jeffrey H.; Mankad, Shawn; Michailidis, George (2015-09-30)
We study the behavior of the interbank market before, during and after the 2008 financial crisis. Leveraging recent advances in network analysis, we study two network structures, a correlation network based on publicly traded bank returns, and a physical network based on interbank lending transactions. While the two networks behave similarly pre-crisis, during the crisis the correlation network shows an increase in interconnectedness while the physical network highlights a marked decrease in interconnectedness. Moreover, these networks respond differently to monetary and macroeconomic shocks. ...
Finance and Economics Discussion Series , Paper 2015-90

Working Paper
Who Provides Credit in Times of Crisis? Evidence from the Auto Loan Market
Canals-Cerda, Jose J.; Lee, Brian Jonghwan (2025-02-05)
We examine the contribution of different lending channels to the auto loan market in times of crisis. Specifically, we explore lending from traditional banks, credit unions, and finance companies (nonbanks) over the past two decades, with an emphasis on the Great Recession and the COVID-19 pandemic. We find that banks provided weak support during the pandemic, thus losing market share and continuing the trend that emerged following the Great Recession. Nonbank market share during this period grew most significantly for subprime borrowers and in counties with stronger bank dependence. Survey ...
Working Papers , Paper 25-06

Discussion Paper
The Term Spread as a Predictor of Financial Instability
Parker, Dean; Schularick, Moritz (2021-11-24)
The term spread is the difference between interest rates on short- and long-dated government securities. It is often referred to as a predictor of the business cycle. In particular, inversions of the yield curve—a negative term spread—are considered an early warning sign. Such inversions typically receive a lot of attention in policy debates when they occur. In this post, we point to another property of the term spread, namely its predictive ability for financial crisis events, both internationally and in historical U.S. data. We study the predictive power of the term spread for financial ...
Liberty Street Economics , Paper 20211124

Discussion Paper
Measuring the Financial Stability Real Interest Rate, r**
Akinci, Ozge; Benigno, Gianluca; Del Negro, Marco; Nourbash, Ethan; Queraltó, Albert (2023-05-24)
Comparing our financial stability real interest rate, r** (“r-double-star”) with the prevailing real interest rate gives a measure of how vulnerable the economy is to financial instability. In this post, we first explain how r** can be measured, and then discuss its evolution over the last fifty years and how to interpret the recent banking turmoil within this framework.
Liberty Street Economics , Paper 20230524

Discussion Paper
The Odd Behavior of Repo Haircuts during the Financial Crisis
Copeland, Adam; Martin, Antoine (2012-09-17)
Since the financial crisis began, there’s been substantial debate on the role of haircuts in U.S. repo markets. (The haircut is the value of the collateral in excess of the value of the cash exchanged in the repo; see our blog post for more on repo markets.) In an influential paper, Gorton and Metrick show that haircuts increased rapidly during the crisis, a phenomenon they characterize as a general “run on repo.” Consequently, some policymakers and academics have considered whether regulating haircuts might help stabilize the repo markets, for example, by setting a minimum level so ...
Liberty Street Economics , Paper 20120917

Discussion Paper
Crisis Chronicles: The Panic of 1825 and the Most Fantastic Financial Swindle of All Time
Narron, James; Morgan, Donald P. (2015-04-10)
Centered in London, the banking panic of 1825 has been called the first modern financial crisis, the first Latin American crisis, and the first emerging market crisis. And while the panic displayed many of the key elements of past crises we have covered?fluctuations in money growth, an investment bubble, a stock market crash, and bank runs?this crisis had its own twists, including a Bank of England that hesitated before stepping in as lender of last resort. But it is perhaps best known for an infamous bond market swindle surrounding an entirely made-up Central American principality. In this ...
Liberty Street Economics , Paper 20150410

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