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Working Paper
Asset supply and liquidity transformation in HANK
Chiang, Yu-Ting; Żoch, Piotr (2022-11-28)
We study how the financial sector affects fiscal and monetary policy in heterogeneous agent New Keynesian (HANK) economies. We show that, in a large class of models of financial intermediation, relevant features of the financial sector are summarized by the elasticities of a liquid asset supply function. The financial sector in these models affects aggregate responses only through its ability to perform liquidity transformation (i.e., issue liquid assets to finance illiquid capital). If liquid asset supply responds inelastically to returns on capital (low cross-price elasticities), ...
Working Papers , Paper 2022-038

Discussion Paper
Treasury Market Liquidity and the Federal Reserve during the COVID-19 Pandemic
Fleming, Michael J. (2020-05-29)
Many of the actions taken by the Federal Reserve during the COVID-19 pandemic are intended to address a deterioration of market functioning. The Federal Open Market Committee (FOMC) announced purchases of Treasury securities and agency mortgage-backed securities (MBS), in particular, “to support the smooth functioning of markets” in those securities. Last month, we showed in this post how one metric of functioning for the Treasury market, market illiquidity, jumped to unusually high levels in March amid massive uncertainty about the economic effects of the pandemic. In this post, we ...
Liberty Street Economics , Paper 20200529a

Working Paper
Liquidity and Investment in General Equilibrium
Caramp, Nicolas; Kozlowski, Julian; Teeple, Keisuke (2023-05-22)
This paper studies the implications of trading frictions in financial markets for firms' investment and dividend choices, and their aggregate consequences. When equity shares trade in frictional asset markets, the firm's problem is time-inconsistent, and it is as if it faces quasi-hyperbolic discounting. The transmission of trading frictions to the real economy crucially depends on the firms' ability to commit. In a calibrated economy without commitment, larger trading frictions imply lower capital and production. In contrast, if firms can commit, trading frictions affect asset prices but ...
Working Papers , Paper 2022-022

Discussion Paper
With Abundant Reserves, Do Banks Adjust Reserve Balances to Accommodate Payment Flows?
Kraft, Kailey; Huang, Catherine; Copeland, Adam (2022-10-12)
As a result of the global financial crisis (GFC), the Federal Reserve switched from a regime of scarce reserves to one of abundant reserves. In this post, we explore how banks’ day-to-day management of reserve balances with respect to payment flows changed with this regime switch. We find that bank behavior did not change on average; under both regimes, banks increased their opening balances when they expected higher outgoing payments and, similarly, decreased these balances with expected higher incoming payments. There are substantial differences across banks, however. At the introduction ...
Liberty Street Economics , Paper 20221012

Report
Credit supply disruptions: from credit crunches to financial crisis
Rosengren, Eric S.; Peek, Joe (2015-10-01)
Events that transpired during the recent financial crisis highlight the important role that financial intermediaries still play in the economy, especially during economic downturns. While the breadth and severity of the financial crisis took most observers by surprise, it has renewed academic interest in understanding the effects on the real economy of both financial shocks and the changing nature of financial intermediation. This interest in the real effects of financial shocks highlights a literature that began more than 20 years ago associated with the bank credit crunch of the early ...
Current Policy Perspectives , Paper 15-5

Speech
Recent Global Developments and Central Bank Responsibilities in a Changing Risk Landscape
http://fedora:8080/fcrepo/rest/objects/authors/ (2020-08-05)
Remarks at the Official Sector Service Providers (OSSP)-Bank Negara Malaysia (BNM)-South East Asian Central Banks (SEACEN) Research and Training Centre Forum on Central Bank Foreign Currency Operations.
Speech

Discussion Paper
U.S. Monetary Policy as a Changing Driver of Global Liquidity
Goldberg, Linda S.; Avdjiev, Stefan; Gambacorta, Leonardo; Schiaffi, Stefano (2017-10-11)
International capital flows channel large volumes of funds across borders to both public and private sector borrowers. As they are critically important for economic growth and financial stability, understanding their main drivers is crucial for both policymakers and researchers. In this post, we explore the evolving impact of changes in U.S. monetary policy on global liquidity.
Liberty Street Economics , Paper 20171011

Working Paper
Credit and Liquidity Policies during Large Crises
Ebsim, Mahdi; Faria-e-Castro, Miguel; Kozlowski, Julian (2024-02-22)
We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC but increased during COVID-19. In the cross-section, leverage was the primary determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of real and financial shocks, while COVID-19 also featured liquidity shocks. We ...
Working Papers , Paper 2020-035

Speech
Taking Stock of the Economic Recovery and the Opportunities to Bolster Financial Stability
Rosengren, Eric S. (2021-04-12)
It seems likely that the economy will grow rapidly this year. This should reduce the slack in the labor markets and eventually return inflation to the Federal Reserve’s 2 percent target. Assuming virus variants do not become especially problematic, we should see an unusually strong post-recession recovery. While the near-term public health and macroeconomic improvements are more than welcome and critically important, I also believe that policymakers across the spectrum should take the time to examine some of the problems brought to the forefront over the past year. In doing so, they can ...
Speech

Working Paper
Market-making with Search and Information Frictions
Venkateswaran, Venky; Shourideh, Ali; Zetlin-Jones, Ariel; Lester, Benjamin (2018-07-19)
We develop a dynamic model of trading through market-makers that incorporates two canonical sources of illiquidity: trading (or search) frictions, which imply that market-makers have some amount of market power; and information frictions, which imply that market-makers face some degree of adverse selection. We use this model to study the effects of various technological innovations and regulatory initiatives that have reduced trading frictions in over-the-counter markets. Our main result is that reducing trading frictions can lead to less liquidity, as measured by bid-ask spreads. The key ...
Working Papers , Paper 18-20

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