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Working Paper
Estimating Dynamic Macroeconomic Models : How Informative Are the Data?
Central banks have long used dynamic stochastic general equilibrium (DSGE) models, which are typically estimated using Bayesian techniques, to inform key policy decisions. This paper offers an empirical strategy that quantifies the information content of the data relative to that of the prior distribution. Using an off-the-shelf DSGE model applied to quarterly Euro Area data from 1970:3 to 2009:4, we show how Monte Carlo simulations can reveal parameters for which the model's structure obscures identification. By integrating out components of the likelihood function and conducting a Bayesian ...
Working Paper
Un-Networking: The Evolution of Networks in the Federal Funds Market
Using a network approach to characterize the evolution of the federal funds market during the Great Recession and financial crisis of 2007-2008, we document that many small federal funds lenders began reducing their lending to larger institutions in the core of the network starting in mid-2007. But an abrupt change occurred in the fall of 2008, when small lenders left the federal funds market en masse and those that remained lent smaller amounts, less frequently. We then test whether changes in lending patterns within key components of the network were associated with increases in ...
Working Paper
Optimizing Credit Gaps for Predicting Financial Crises: Modelling Choices and Tradeoffs
Credit gaps are good predictors for financial crises, and banking regulators recommend using them to inform countercyclical capital buffers for banks. Researchers typically create credit gap measures using trend-cycle decomposition methods, which require many modelling choices, such as the method used, and the smoothness of the underlying trend. Other choices hinge on the tradeoffs implicit in how gaps are used as early warning indicators (EWIs) for predicting crises, such as the preference over false positives and false negatives. We evaluate how the performance of credit-gap-based EWIs for ...
Working Paper
Estimating the parameters of a small open economy DSGE model: identifiability and inferential validity
This paper estimates the parameters of a stylized dynamic stochastic general equilibrium model using maximum likelihood and Bayesian methods, paying special attention to the issue of weak parameter identification. Given the model and the available data, the posterior estimates of the weakly identified parameters are very sensitive to the choice of priors. We provide a set of tools to diagnose weak identification, which include surface plots of the log-likelihood as a function of two parameters, heat plots of the log-likelihood as a function of three parameters, Monte Carlo simulations using ...
Working Paper
Taxonomy of Global Risk, Uncertainty, and Volatility Measures
A large number of measures for monitoring risk and uncertainty surrounding macroeconomic and financial outcomes have been proposed in the literature, and these measures are frequently used by market participants, policy makers, and researchers in their analyses. However, risk and uncertainty measures differ across multiple dimensions, including the method of calculation, the underlying outcome (that is, the asset price or macroeconomic variable), and the horizon at which they are calculated. Therefore, in this paper, we review the literature on global risk, uncertainty, and volatility ...
Discussion Paper
How Vulnerable are EME Corporates?
This note provides an update on the health of EME corporates and examines the extent to which they are vulnerable to risks, including those that might be associated with monetary policy normalization in advanced economies.
Working Paper
What are Large Global Banks Doing About Climate Change?
We review the "climate action plans" of Global Systemically Important Banks (GSIBs) and the progress they are making toward achieving them. G-SIBs have identified the drivers of climate risk and their transmission channels to credit and other risks. Additionally, some have started to measure and model these risks. While most GSIBs have committed to fully offsetting their emissions by mid-century, they are only beginning to measure financed emissions resulting from their loans and investments, which comprise the vast majority of their emissions. G-SIBs have also committed to increase green ...
Discussion Paper
Emerging Market Nonfinancial Corporate Debt : How Concerned Should We Be?
Nonfinancial corporate (NFC) debt in emerging market economies (EMEs) has tripled since the global financial crisis (GFC), reaching roughly $25 trillion, or 112 percent of GDP, in mid-2016. In this note, we assess corporate vulnerabilities by looking at two common metrics related to debt-servicing capacity: leverage (the ratio of debt to equity), and the interest coverage ratio (the ratio of earnings to interest expense).
Working Paper
Foreign holdings of U.S. Treasuries and U.S. Treasury yields
Foreign official holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the official sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign official purchases of U.S. Treasuries. Would such a slowing of foreign ...
Working Paper
Could asymmetric information alone have caused the collapse of private-label securitization?
A key feature of the 2007-2008 financial crisis is that for some classes of securities trade has ceased. And where trade does occur, it appears that market prices are well below what one might believe to be the intrinsic value for that class of security. This seems to be especially true for those securities where the payoff streams are particularly complex (for example, CDOs). One explanation for this is that information about these securities' intrinsic values is asymmetric, with the current holders having better information than potential buyers. We show how the resulting adverse selection ...