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Emerging-market countries insulate themselves from Fed rate hikes
Davis, J. Scott; Sagnanert, Pon (2023-08-08)
Earlier episodes of sizable Fed tightening preceded destabilizing currency devaluations in emerging markets, precipitating sovereign debt and banking crises in many of those economies
Dallas Fed Economics

Discussion Paper
What Happens to U.S. Activity and Inflation if China’s Property Sector Leads to a Crisis?
Akinci, Ozge; Clark, Hunter L.; Dawson, Jeffrey B.; Higgins, Matthew; Miranda-Agrippino, Silvia; Nourbash, Ethan; Nallamotu, Ramya (2024-03-26)
A previous post explored the potential implications for U.S. growth and inflation of a manufacturing-led boom in China. This post considers spillovers to the U.S. from a downside scenario, one in which China’s ongoing property sector slump takes another leg down and precipitates an economic hard landing and financial crisis.
Liberty Street Economics , Paper 20240326

Working Paper
A Model of Slow Recoveries from Financial Crises
Queraltó, Albert (2013-12-18)
This paper documents highly persistent effects of financial crises on output, labor productivity and employment in a sample of emerging economies. To address these facts, it introduces a quantitative macroeconomic model that includes endogenous TFP growth through firm creation. Firm creators obtain funding from a financial intermediation sector which is subject to frictions. These frictions become especially severe in a financial crisis, increasing the cost of credit for firm creators and thereby lowering the growth rate of aggregate TFP. As a consequence, the model produces medium-run ...
International Finance Discussion Papers , Paper 1097

Working Paper
Fiscal Multipliers and Financial Crises
Faria-e-Castro, Miguel (2022-01)
I study the effects of the US fiscal policy response to the Great Recession, accounting both for standard tools and financial sector interventions. A nonlinear model calibrated to the US allows me to study the state-dependent effects of different fiscal policies. I combine the model with data on the fiscal policy response to find that the fall in consumption would have been one-third larger in the absence of that response, for a cumulative loss of 7.18%. Transfers and bank recapitalizations yielded the largest fiscal multipliers through new transmission channels that arise from linkages ...
Working Papers , Paper 2018-023

Working Paper
A Quantitative Analysis of Countercyclical Capital Buffers
Faria-e-Castro, Miguel (2019-03-19)
What are the quantitative effects of countercyclical capital buffers (CCyB)? I study this question in the context of a nonlinear DSGE model with a financial sector that is subject to occasional panics. A calibrated version of the model is combined with US data to estimate sequences of structural shocks, allowing me to study policy counterfactuals. First, I show that raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. Second, I show that lowering capital buffers during a panic can moderate the intensity of the resulting crisis. A ...
Working Papers , Paper 2019-8

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

Report
Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach
Benigno, Gianluca; Foerster, Andrew T.; Otrok, Christopher; Rebucci, Alessandro (2020-10-01)
We estimate a workhorse dynamic stochastic general equilibrium (DSGE) model with an occasionally binding borrowing constraint. First, we propose a new speciﬁcation of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This speciﬁcation maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to ﬁt Mexico’s business cycle and ...
Staff Reports , Paper 944

Working Paper
Loose Monetary Policy and Financial Instability
Grimm, Maximilian; Jordà, Òscar; Schularick, Moritz; Taylor, Alan M. (2023-02-06)
Do periods of persistently loose monetary policy increase financial fragility and the likelihood of a financial crisis? This is a central question for policymakers, yet the literature does not provide systematic empirical evidence about this link at the aggregate level. In this paper we fill this gap by analyzing long run historical data. We find that when the stance of monetary policy is accommodative over an extended period, the likelihood of financial turmoil down the road increases considerably. We investigate the causal pathways that lead to this result and argue that credit creation and ...
Working Paper Series , Paper 2023-06

Report
Optimal Policy for Macro-Financial Stability
Young, Eric R.; Benigno, Gianluca; Otrok, Christopher; Chen, Huigang; Rebucci, Alessandro (2019-10-01)
There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. These normative analyses build upon the concept of constrained efficient allocation, where the social planner is constrained by the same borrowing limit that agents face. In this paper, we show that the same set of policy tools that implement the constrained efficient allocation can be used by a Ramsey planner to replicate the unconstrained allocation, thus achieving higher welfare. The constrained social planner approach may lead to inaccurate ...
Staff Reports , Paper 899

Anticipatory discount window stigma
Schulhofer-Wohl, Sam (2024-09-06)
Observers often assert that stigma—a perception that depositors, investors or others will penalize an institution for borrowing from the discount window—keeps banks from borrowing when they should, making the facilities less effective. Dallas Fed Senior Vice President Sam Schulhofer-Wohl argues that some harms of discount window stigma can be mitigated regardless of whether stigma itself persists.
Dallas Fed Economics

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