Financial Markets
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The Souk al-Manakh Crash
From 1978 to 1981, Kuwait’s two stock markets, one the conservatively regulated “official” market and the other the unregulated Souk al-Manakh, exploded in size, growing to the point where the amount of capital actively traded exceeded that of every other country in the world except the United States and Japan. A year later, the system collapsed in an instant, causing huge real losses to the economy and financial disruption lasting nearly a decade. This Commentary examines the emergence of the Souk, the simple financial innovation that evolved to solve its rapidly increasing need for liquidity and credit, and the herculean efforts to solve the tangled problems resulting from the collapse. Two lessons of Kuwait’s crisis are that it is difficult to separate the banking and unregulated financial sectors and that regulators need detailed data on the transactions being conducted at all financial institutions to give them the understanding of the entire network they must have to maintain financial stability. If Kuwaiti officials had had transaction-by-transaction data on the trades being made in both the regulated and unregulated stock markets, then the Kuwaiti crisis and its aftermath might not have been so severe. Read More
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Have Stress Tests Impacted Small-Business Lending?
The Federal Reserve conducts stress tests of the largest bank holding companies to ensure that the banking system has sufficient capital to stay financially sound in the event of worsening economic conditions. Some groups have raised concerns that the stress tests will reduce lending to small businesses. This article describes recent research investigating the impact of the stress tests on small-business lending. It finds that the banks that are most affected by stress tests have reduced their small-business credit, but aggregate credit to small businesses has not fallen. Read More
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Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications
In this paper, we use two comprehensive micro datasets to study the evolution of the distribution of mortgage debt during the 2000s housing boom. We show that the allocation of mortgage debt remained stable, as did the distribution of real estate assets. We propose that any theory of the boom must replicate this fact. Using a general equilibrium model, we show that this requires two elements: (1) an exogenous shock to the economy that increases expected house price growth or, alternatively, reduces interest rates and (2) financial markets that endogenously relax constraints in response to the shock. The role played by subprime mortgage debt provides additional empirical evidence that this narrative mirrors reality. Read More
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Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation
We study the implications of multiperiod mortgage loans for monetary policy, considering several realistic modifications—fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack—to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective and may lead to asymmetric responses to positive and negative monetary shocks. Read More
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Yield Curve and Predicted GDP Growth, December 2018
In December, the yield curve continues twisting flatter, with short rates rising and long rates falling. The yield curve slope fell to 47 basis points. While predicted real GDP growth over the next year remained the same at 2.0 percent, the expected chance of the economy being in a recession in 12 months rose to 24 percent. Read More
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Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985-2015
The application of information technology to finance, or “fintech,” is expected to revolutionize many aspects of borrowing and lending in the future, but technology has been reshaping consumer and mortgage lending for many years. During the 1990s computerization allowed mortgage lenders to reduce loan-processing times and largely replace human-based assessment of credit risk with default predictions generated by sophisticated empirical models. Debt-to-income ratios at origination add little to the predictive power of these models, so the new automated underwriting systems allowed higher debt-to-income ratios than previous underwriting guidelines would have typically accepted. In this way, technology brought about an exogenous change in lending standards, which helped raise the homeownership rate and encourage the conversion of rental properties to owner-occupied ones, but did not have large effects on housing prices. Technological innovation in mortgage underwriting may have allowed the 2000s housing boom to grow, however, because it enhanced the ability of both borrowers and lenders to act on optimistic beliefs about future house-price growth. Read More
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Costly Information Intermediation as a Natural Monopoly
Many markets rely on information intermediation to sustain cooperation between large communities. We identify a key trade-off in costly information intermediation: intermediaries can create trust by incentivizing information exchange, but with too much information acquisition, intermediation becomes expensive, with a resulting high equilibrium default rate and a low fraction of agents buying this information. The particular pricing scheme and the competitive environment affect the direct and indirect costs of information transmission, represented by fees paid by consumers and the expected loss due to imperfect information, respectively. Moreover, we show that information trade has characteristics similar to a natural monopoly, where competition may be detrimental to efficiency either because of the duplication of direct costs or the slowing down of information spillovers. Finally, a social-welfare-maximizing policymaker optimally chooses a low information sampling frequency in order to maximize the number of partially informed agents. In other words, maximizing information spillovers, even at the cost of slow information accumulation, enhances welfare. Read More
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Yield Curve and Predicted GDP Growth, November 2018
In November, the yield curve twisted flatter, with short rates rising and long rates falling. The yield curve slope fell to 66 basis points. While predicted real GDP growth over the next year remained the same at 2.0 percent, the expected chance of the economy being in a recession in 12 months rose to 20.3 percent. Read More
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Yield Curve and Predicted GDP Growth, October 2018
In October, the yield curve shifted upward in nearly parallel fashion, with both long and short rates moving up. Read More
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Yield Curve and Predicted GDP Growth, September 2018
In September, the yield curve steepened as longer rates bounced to the upside and outpaced short rates. The yield curve slope increased to 88 basis points. While predicted real GDP growth over the next year remained the same at 1.6 percent, the expected chance of the economy being in a recession in 12 months fell to 16.5 percent. Read More
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Yield Curve and Predicted GDP Growth, August 2018
In August the yield curve twisted flatter, as short rates moved up and long rates moved down, and the yield curve slope dropped to 75 basis points. While predicted real GDP growth over the next year remained the same at 1.6 percent, the expected chance of the economy being in a recession in 12 months rose to 18.8 percent. Read More
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Yield Curve and Predicted GDP Growth, July 2018
In July the yield curve twisted flatter, as short rates moved up and long rates moved down. The yield curve slope dropped to 86 basis points, predicted real GDP growth over the next year rose slightly to 1.6 percent, and the expected chance of the economy being in a recession in 12 months rose to 16.9 percent. Read More
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Yield Curve and Predicted GDP Growth, June 2018
In May, short rates moved up and long rates fell, causing the yield curve to twist flatter. The yield curve slope fell to 97 basis points. Predicted real GDP growth over the next year remained at 1.5 percent, and the expected chance of the economy being in a recession in 12 months rose to 15.2 percent. Read More
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Information Production, Misconduct Effort, and the Duration of Financial Misrepresentation
We examine the link between information produced by auditors and analysts and fraud duration. Using a hazard model, we analyze misstatement periods related to SEC accounting and auditing enforcement releases (AAERs) between 1982 and 2012. Results suggest that misconduct is more likely to end just after firms announce an auditor switch or issue audited financial statements, particularly when the audit report contains explanatory language. Analyst following increases the fraud termination hazard. However, increases (decreases) in analyst coverage have a negative (positive) marginal impact on the termination hazard, suggesting that analysts signal whistleblowers with their choice to add or drop coverage. Finally, our results suggest that misconduct lasts longer when it is well planned, more complex, or involves more accrual manipulation. Taken together, our findings are consistent with auditors and analysts playing a key informational role in fraud detection, while managerial effort to conceal misconduct significantly extends its duration. Read More
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Yield Curve and Predicted GDP Growth, May 2018
In April, short and long rates moved up in parallel fashion, and the yield curve slope rose slightly to 109 basis points. Predicted real GDP growth over the next year remained at 1.5 percent, and the expected chance of the economy being in a recession in 12 months fell to 13.4 percent. Read More
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The Taste of Peer-to-Peer Loans
This working paper has been removed due to concerns that the underlying data sample used in the analysis does not support the paper’s conclusions. Read More
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Merger Control in the Banking Sector
This Commentary discusses the implications of merger control policy on merger activity in the banking sector, drawing on an analysis of the European banking sector during a period in which stricter merger policies were being introduced. It identifies several changes to the bank mergers taking place after the introduction of the stricter policies that are consistent with higher expected returns for shareholders and more procompetitive transactions. Read More
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Dotcom Price Spiral
We show that during the bubble implied growth rates coming from the underpricing of IPO market explains short term returns on the NASDAQ index. We also show that growth proxies that are not contaminated by the booms and busts of the stock market are uncorrelated with the returns on the NASDAQ index in periods outside the bubble. Read More
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Venture Capital and Underpricing: Capacity Constraints and Early Sales
I present a model of the venture capital (VC) and public markets in which VCs suffer from capacity constraints, due to the shortage of skilled VC managers. Consequently, VC firms can only handle a limited number of new projects at once, having to divest from ongoing projects in order to take advantage of new opportunities. This framework is able to match key features presented by the VC and initial public offer (IPO) empirical literatures. Read More
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Dotcom Extreme Underpricing
We conjecture that the Dotcom abnormal underpricing resulted from the emergence a large cohort of firms racing for market leadership/survivorship. Fundamentals pricing at the IPO was part of their strategy. Consistent with our conjecture, firms’ strategic goals and characteristics fully explain the abnormal underpricing. Contrary to alternatives explanations, underpricing was not associated with top underwriting; there was no deterioration of issuers’ quality; and top underwriters and analysts became more selective. Read More
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The Impact of Merger Legislation on Bank Mergers
We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points. Analyzing potential explanations for this result, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers, and a decreasing share of transactions in which banks are acquired by other banks. Read More
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Financial Engineering and Economic Development
We describe a dynamic extension of Allen and Gale (1989)'s optimal security design model in which producers can tranche the stochastic cash flows they generate at a cost. Lowering security creation costs in that environment leads to more financial investment, but it has ambiguous effects on capital formation, output, and aggregate productivity. Much of the investment boom caused by increased securitization activities can, in fact, be spent on securitization costs and intermediation rents, with little or even negative effects on development and productivity. Read More
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The Federal Funds Market since the Financial Crisis
Through the federal funds market, commercial banks used to supply each other with overnight liquidity. But since the financial crisis, the banking system has been awash in reserves and the federal funds rate has been near zero, leaving banks little incentive to participate. Still, the market continues to operate, but it has changed. Read More
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Does Differential Treatment Translate to Differential Outcomes for Minority Borrowers? Evidence from Matching a Field Experiment to Loan-Level Data
This paper provides evidence on the relationship between differential treatment of minority borrowers and their mortgage market outcomes. Our results suggest that differential outcomes are related to within-institution factors, not just across-institution factors like institutional access, as previous studies find. Read More
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The Dotcom Bubble and Underpricing: Conjectures and Evidence
We provide conjectures for what caused the price spiral and the high underpricing of the dotcom bubble of 1999–2000. We show that returns on NASDAQ composite index are explained by the flow of high-growth (or highly underpriced) IPOs; the high underpricing can be fully explained by firms' characteristics and strategic goals. We also show that, contrary to alternatives explanations, underpricing was not associated with top underwriting, there was no deterioration of issuers' quality, and top underwriters and analysts became more selective. Read More
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Undiversifying during Crises: Is It a Good Idea?
High levels of correlation among financial assets and extreme losses are typical during crises. In such situations, it is an open question whether it would be better to hold diversified portfolios. We investigate alternative strategies in this paper. Read More
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A New Perspective on the Finance-Development Nexus
We describe a dynamic extension of Allen and Gale (1989)'s optimal security design model in which producers can tranche the stochastic cash flows they generate at a cost. Lower tranching costs in that environment lead to capital deepening and raise aggregate output. The implications of lower tranching costs for TFP, on the other hand, are fundamentally ambiguous. Read More
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Venture Capital and Underpricing: Capacity Constraints and Early Sales
I present a model of the venture capital (VC) and public markets in which there is a shortage of skilled VC managers. Consequently, VC firms can only handle a limited number of new projects at once, having to take ongoing projects public in order to take advantage of new opportunities. This framework is able to match key features in the VC and IPO empirical literatures. Read More
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Peer Pressure: Social Interaction and the Disposition Effect
Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. Read More
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How Do Lead Banks Use Their Private Information about Loan Quality in the Syndicated Loan Market?
We formulate and test two hypotheses, the Signaling Hypothesis and Sophisticated Syndicate Hypothesis, to investigate how lead banks in the syndicated loan market use their private information about loan quality. Read More
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The Impact of Merger Legislation on Bank Mergers
We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points, and we analyze potential explanations for this result. Read More
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National Preferences for Bank or Market Financing
This article examines the reasons some countries favor bank-based financial systems and others favor markets-based financial systems. Read More
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Term Premium Variability and Monetary Policy
Two traditional explanations for the mean and variability of the term premium are the time-varying risk premia on long bonds and the segmented markets between long- and short-term bonds. This paper integrates these two approaches into a medium-scale DSGE model, considering two sources of business cycle variability. Read More
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Survey Sheds Light on Small-Business Experiences
Federal Reserve Banks asked, and more than 5,000 answered: A majority of small employer firms reported they were operating profitably and were able to secure financing. Read More
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Bankers’ Appetite for Small Business Loans Grows
Lenders say small companies’ balance sheets have improved, making for increasingly competitive lending conditions. Read More
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Competitors' Stock Price Reaction to Mass Layoff Announcements
Using data on layoff announcements by S&P 500 firms, we show that layoff announcements mostly contain industrywide news. Our findings suggest that investors perceive layoffs as a change in growth options rather than a change in the competitive environment. Read More
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Premium Municipal Bonds and Issuer Fiscal Distress
Economic theory suggests that bond issuers of lower credit quality or higher opacity should be more likely to issue bonds with premium coupons (higher coupon rates relative to yields at issuance). Read More
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Macro Credit Policy and the Financial Accelerator
This paper studies macro credit policies within the celebrated financial accelerator model of Bernanke, Gertler and Gilchrist (1999). The focus is on borrower-based restrictions on lending such as loan-to-value (LTV) ratios. Read More
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From Organization to Activity in the US Collateralized Interbank Market
This paper studies and connects market organization and activity in the US collateralized interbank market using an assumption-neutral approach. Read More
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Give ’em Enough Rope? Leveraged Trading when Investors are Overconfident
Can leverage constraints mitigate overconfident financial decision-making? I examine CFTC regulation capping the maximum permissible leverage available to U.S. households that trade foreign exchange on the same brokerages as similar but unregulated European traders. The constraint reduces trading volume and alleviates up to three-quarters of per-trade losses. Read More
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Facebook Finance: How Social Interaction Propagates Active Investing
This paper shows how active investing strategies propagate through social connections in a network of retail traders, using a new database of social activity linked to individual-level trading records. Read More
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YOLO: Mortality Beliefs and Household Finance Puzzles
Subjective mortality beliefs affect pre- and post-retirement consumption and savings decisions, as well as portfolio allocation. New survey evidence shows that individuals overestimate their mortality at short horizons and survival rate at long horizons. Read More
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Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters
Multi-market banks reallocate capital when local credit demand increases after natural disasters. Read More
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Intermediation in Networks
I study intermediation in networked markets using a stochastic model of multilateral bargaining in which players compete on different routes through the network. Read More
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Comparing Price-to-Earnings Ratios: The S&P 500 Forward P/E and the CAPE
We look at a couple variants of the P/E ratio and compare the kinds of information each provides. Read More
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Forecasts from Reduced-form Models under the Zero-Lower-Bound Constraint
In this paper, I present a method for forecasting from a reduced-form VAR under the zero lower bound (ZLB) for the short-term nominal interest rate. Read More
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Book Review: The Plastic Banknote: From Concept to Reality
A fascinating story spanning 30 years, from the initial 1968 proposal to the release of an A $10 commemorative note in 1988 to the complete switch in 1996 from Australia’s ‘paper’ to polymer notes. Read More
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Determinants of Expected Returns at Public Defined-Benefit Pension Plans
We present the results of a panel analysis of data on the determinants of returns of US public defined-benefit pension plans for the period 2001-2011. Read More
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The Yield Curve and Predicted GDP Growth, April 2015
The yield curve moved flatter in April. As has been typical lately, most of the action was at the long end, while the short end inched upward with the three-month Treasury bill rate staying constant. Read More
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Did Core Deposits Hedge Loan-Commitment Risk during the Financial Crisis?
During financial crises, banks can experience heightened demand for liquidity as customers draw down lines of credit and other loan commitments. Some researchers say core deposits naturally rise to meet the demand. Do they? Read More
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Book Review: Cash Box: The Invention and Globalization of the ATM
Cash Box follows the evolution of the ATM from primitive to sophisticated, and in the process illuminates banking innovation as something that should not be taken for granted. Read More
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Excess Reserves: Oceans of Cash
Before the financial crisis, banks did not hold much in cash reserves above what the Fed required. Now they hold a lot of excess reserves because the costs and benefits of doing so have changed. Read More
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Can Reputation Ensure Efficiency in the Structured Finance Market?
This paper investigates whether the fear of losing its reputation can discipline a credit rating agency (CRA) in the structured finance market, where products are opaque and ratings are unverifiable. Read More
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Big Data versus a Survey
Economists are shifting attention and resources from work on survey data to work on "big data." This analysis is an empirical exploration of the trade-offs this transition requires. Read More
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Can Leverage Constraints Help Investors?
This paper provides causal evidence that leverage constraints can reduce the underperformance of individual investors. Read More
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Legal Institutions, Credit Markets, and Economic Activity
This paper provides novel evidence on the causal connections between legal institutions, credit markets, and real economic activity. Read More
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Interest Rate Risk and Rising Maturities
This Commentary examines the maturity structure of assets and liabilities to identify the underlying factors responsible for the rise in interest rate risk and the differences between large and small banks. Read More
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The Role of Interbank Relationships and Liquidity Needs
In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. Read More
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Tracking Recent Levels of Financial Stress - October
The Cleveland Financial Stress Index (CFSI) fluctuated between grades 1 and 2 throughout the third quarter of 2014. Read More
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Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters
Multi-market banks reallocate capital when local credit demand increases after natural disasters. Read More
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Peer-to-Peer Lending Is Poised to Grow
Peer-to-peer lending-a type of lending which matches individual borrowers with investors-is a recent innovation. Because it fills at least two gaps left by traditional lending sources, it is likely to continue growing for some time. Read More
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Tracking Recent Levels of Financial Stress - July
The Cleveland Financial Stress Index (CFSI) remained in Grade 2 or a "normal stress" period throughout the early part of second quarter 2014. Read More
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Financial Innovations and Issuer Sophistication in Municipal Securities Markets
When local governments default or file for bankruptcy, it is often because public officials misunderstood the risks associated with innovative financial products. Read More
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Do Public Pension Obligations Affect State Funding Costs?
States’ unfunded pension obligations to their current and retired employees have exploded in recent years to levels that are estimated to be between $750 billion and $4.4 trillion. Read More
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What’s Behind the Decline in Tri-party Repo Trading Volumes?
Total collateral value in the tri-party repo market rose steeply after 2011, peaked toward the end of 2012, and then fell steeply. The decline may have been caused by an increase in Fed purchases and holdings of agency securities. Read More
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Tracking Recent Levels of Financial Stress - April
The Cleveland Financial Stress Index (CFSI) remained in a Grade 1 or "low stress" period throughout most of the first quarter of 2014. Read More
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Money Market Mutual Funds and Financial Stability
To assess the risk posed by money market funds to the financial system, we compare the aggregate portfolios of funds before and after the crisis and look at their liquidity positions since 2011. Read More
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Consumer Debt Dynamics: Follow the Increasers
Consumer debt played a central role in creating the U.S. housing bubble, the ensuing housing downturn, and the Great Recession, and it has been blamed as a factor in the weak subsequent recovery as well. Read More
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Tracking Recent Levels of Financial Stress - January
The Cleveland Financial Stress Index (CFSI) has trended down throughout the fourth quarter of 2013 and early this year Read More
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Lending to Women in Microfinance: Influence of Social Trust and National Culture
The preference of microfinance institutions for women borrowers is generally attributed to two reasons: women borrowers are more trustworthy and have greater social impact. Read More
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Friends Do Let Friends Buy Stocks Actively
This research is the first to provide empirical evidence that social interaction is more prevalent amongst active rather than passive investors. Read More
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Why Small Business Lending Isn’t What It Used to Be
Since the Great Recession, bank lending to small businesses has fallen significantly, and policymakers have become concerned that these businesses are not getting the credit they need. Read More
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On the Non-Optimality of a Diamond-Dybvig Contract in the Goldstein-Pauzner Environment
I show, under intuitive conditions on the risk-averse utility function, the nonoptimality of the Diamond and Dybvig (1983) contract in the Goldstein and Pauzner (2005) environment. Read More
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The Yield Curve and Predicted GDP Growth, April 2013
Over the past month, the yield curve has moved down, and though both short and long rates fell, the change in long rates dominated, and the curve became significantly flatter. Read More
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Why Are Interest Rates So Low?
Interest rates have been at historical lows for some time now. There are many possible reasons why that is so. Read More
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The Yield Curve and Predicted GDP Growth, March 2013
Over the past month, the yield curve has gotten somewhat steeper, as long rates rose and short rates fell (both slightly). Read More
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Yield Curve and Predicted GDP Growth, February 2013
Over the past month, the yield curve has moved up, getting somewhat steeper in the process, as long rates moved more than short rates. Read More
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Has the Appetite for Risk Returned?
The year 2012 was a busy one for risky debt. The total value of the various forms of risky debt that were issued—corporate debt, asset-backed securities, collateralized debt obligations, and municipal debt in particular—grew substantially ... Read More
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Do Public Pension Obligations Affect State Funding Costs?
States' unfunded pension obligations to their current and retired employees have exploded in recent years to levels that are estimated to be between $750 billion and $4.4 trillion. Read More
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Yield Curve and Predicted GDP Growth, January 2013
Over the past month, the yield curve has gotten noticeably steeper, with long rates moving up and short rates barely budging. Read More
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Yield Curve and Predicted GDP Growth, December 2012
Over the past month, the yield curve has gotten slightly steeper, with long rates edging up and short rates edging down. Read More
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Yield Curve and Predicted GDP Growth, November 2012
Over the past month, the yield curve has flattened slightly, with long rates falling more than short short rates. Read More
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Bridging the Gap? Government Subsidized Lending and Access to Capital
We examine the Community Development Financial Institution (CDFI) Fund's impact on credit union activity, using hitherto little studied U.S. Treasury data. Read More
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Did Local Lenders Forecast the Bust? Evidence from the Real Estate Market
This paper shows that mortgage lenders with a physical branch near the property being financed have better information about home-price fundamentals than nonlocal lenders. Read More
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Yield Curve and Predicted GDP Growth, October 2012
Over the past month, the yield curve has gotten imperceptibly flatter, as both long and short short rates crept down, nearly in parallel. Read More
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Alternatives to Libor in Consumer Mortgages
Many adjustable rate mortgages in the United States are indexed to Libor. Read More
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Yield Curve and Predicted GDP Growth, September 2012
Over the past month, the yield curve has steepened somewhat, even as both long and short rates moved up. Read More
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Yield Curve and Predicted GDP Growth, August 2012
Over the past month, the yield curve has steepened, as short rates stayed even and long rates took a jump up. Read More
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Yield Curve and Predicted GDP Growth, July 2012
Over the past month, the yield curve has gotten flatter, as short rates stayed nearly even and long rates dropped. Read More
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How Many U.S. Mortgages Are Linked to Libor?
The London interbank offered rate, or Libor, has served as a baseline for many bank-to-bank transactions in U.S. dollars since it was established in 1986. Read More
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Yield Curve and Predicted GDP Growth, June 2012
Over the past month, the yield curve has flattened, as short rates stayed even and long rates fell. Read More
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Subdued Business Lending
The financial crisis and subsequent recession caused bank profitability to decline significantly. Read More
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Yield Curve and Predicted GDP Growth, May 2012
Over the past month, the yield curve has flattened, as short rates stayed even and long rates fell. Read More
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A Return to Lower Levels of Investment Activity
Economic growth continues to be modest compared to previous recoveries. Read More
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Exchange-Traded Funds
ETFs are one of the most successful financial innovations of the last few decades. Read More
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Strategically Distressed
It has been over two-and-a-half years since the National Bureau of Economic Research called an end to the recession that began in late 2007. Read More
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Yield Curve and Predicted GDP Growth, April 2012
Over the past month, the yield curve has flattened, as short rates stayed even and long rates fell. Read More
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Yield Curve and Predicted GDP Growth, March 2012
Over the past month, the yield curve has gotten noticeably steeper, as short rates edged down and long rates jumped up. The three-month Treasury bill dropped to 0.09 percent (for the week ending March 16). Read More
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Yield Curve and Predicted GDP Growth, February 2012
Over the past month, the yield curve has flattened somewhat, as short rates moved up while longer rates barely budged. Read More
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Yield Curve and Predicted GDP Growth, January 2012
Starting the new year, the yield curve rose, with both long and short rates rising slightly. Read More
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Yield Curve and Predicted GDP Growth, December 2011
In December the yield curve moved flatter. Long rates fell, and short rates stayed the same, because they can go no lower. Read More
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Yield Curve and Predicted GDP Growth, November 2011
In November the yield curve got flatter, partially reversing October’s steepening, but still staying above September’s slope. Read More
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Yield Curve and Predicted GDP Growth, October 2011
If September saw a flattening in the yield curve in the wake of Operation Twist (formally, the Maturity Extension Program and Reinvestment Policy of the Federal Reserve), October saw a reversal. Read More
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The Term Structure of Inflation Compensation in the Nominal Yield Curve
We propose a DSGE model with regime switching in the central bank’s inflation target to explain inflation compensation in the UK. Read More
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Liquidity and the Threat of Fraudulent Assets
We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. Read More
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Yield Curve and Predicted GDP Growth, September 2011
Since last month and in the wake of the Maturity Extension Program and Reinvestment Policy of the Federal Reserve, more colloquially known as Operation Twist, or Let’s Twist Again, the yield curve has flattened as long rates fell. Read More
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Interest Rates Have Responded to the Fed’s New Language
At its August policy meeting, the Federal Reserve took the unprecedented step of establishing a specific future date for policy action given current economic conditions. Read More
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Yield Curve and Predicted GDP Growt, August 2011
Over the past month, the yield curve flattened as long rates fell. The three-month Treasury bill rate dropped to 0.01 percent (for the week ending August 26), down from July’s 0.03 percent and even below June’s 0.02 percent. Read More
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Credit Flows to Business During the Great Recession
During the last recession, credit flows suffered their worst slowdown since World War II. Read More
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Has the Over-the-Counter Derivatives Market Revived Yet?
Derivatives are financial instruments whose values depend on the values of other assets such as stocks, bonds, and commodities. Firms, banks, and investors can use derivatives to hedge various kinds of risks. Read More
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Yield Curve and Predicted GDP Growth, July 2011
Over the past month, the yield curve barely moved, experiencing a small parallel upward shift as both short and long rates inched along. Read More
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Public Policy in Support of Small Business: The American Experience
Government interventions to alleviate credit constraints on small firms need to be designed to correct the specific market failure resulting in socially suboptimal credit flows. Read More
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The Yield Curve and Projected GDP Growth, June 2011
Over the past month, the yield curve dropped and flattened slightly as both long rates and short rates dropped. Read More
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Yield Curve and Predicted GDP Growth, May 2011
Over the past month, the yield curve became flatter, as long rates dropped, reversing their previous increase. Short rates edged down yet again. Read More
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The Yield Curve as a Predictor of Economic Growth, April 2011
Over the past month, the yield curve became steeper, as long rates increased, resuming a trend that had been broken in the previous month. Read More
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Prioritization in Private-Activity-Bond Volume Cap Allocation
This paper proposes and tests a structural model reflecting the process of authorizing private-activity municipal bond issuance. Read More
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False Security How Securitization Failed to Protect Arrangers and Investors from Borrower Claims
We argue that any new housing finance system must clarify the liability of participants in the securitization pipeline so that the market can more accurately price securities and stop problem loans from entering the pipeline. Read More
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The Yield Curve as a Predictor of Economic Growth, March 2011
Over the past month, the yield curve flattened, as long rates dropped sharply, reversing their pattern of the past several months. Read More
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Yield Curve and Predicted GDP Growth, February 2011
The yield curve twisted steeper over the past month, as long rates once again increased substantially, moving up nearly one quarter of a percentage point, while short rates edged down. Read More
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Liquidity in Frictional Asset Markets
We review the literature on asset markets with trading frictions in both finance and monetary theory using a simple search-theoretic model, and we discuss the papers presented at the conference, "Liquidity in Frictional Asset Markets." Read More
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Yield Curve and Predicted GDP Growth, January 2011
Continuing a recent trend, the yield curve became steeper over the past month, as long rates increased nearly 0.2 percent, and short rates inched up. Read More
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Yield Curve and Predicted GDP Growth, December 2010
Continuing a recent trend, the yield curve moved sharply steeper over the past month, as long rates increased nearly three-tenths of one percent, and short rates held steady. Read More
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The Effect of Falling Home Prices on Small Business Borrowing
Small businesses continue to report problems obtaining the financing they need. Read More
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Yield Curve and Predicted GDP Growth, November 2010
The yield curve became sharply steeper over the past month, as long rates increased nearly 0.4 percent, and short rates held steady. Read More
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The Importance of Financial Market Development on the Relationship between Loan Guarantees for SMEs and Local Market Employment Rates
We empirically examine whether a major government intervention in the small-firm credit market yields significantly better results in markets that are less financially developed. Read More
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Yield Curve and Predicted GDP Growth, October 2010
Long rates dropped over the past month, flattening out the yield curve, as short rates stayed level. Read More
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Liquidity and Asset Market Dynamics
We study economies with an essential role for liquid assets in transactions. The model can generate multiple stationary equilibria, across which asset prices, market participation, capitalization, output and welfare are positively related. Read More
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Yield Curve and Predicted GDP Growth, September 2010
Long rates took a turn higher over the past month, adding a bit of steepness to the yield curve, as short rates stayed level. Read More
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Private-Activity Municipal Bonds: The Political Economy of Volume Cap Allocation
State governments allocate authority to issue tax-exempt bonds to fund "private activities" such as student loans and low-income housing. This paper presents political economy models of the allocation process and an empirical analysis. Read More
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Yield Curve and Predicted GDP Growth, August 2010
As long rates continue their steep slide, the yield curve has flattened, as short rates stayed level. Read More
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Where Does the Mortgage Market Go from Here?
In the first quarter of 2010, it appeared that the mortgage market was running out of steam. Read More
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Yield Curve and Predicted GDP Growth, July 2010
Since last month, the yield curve has flattened, as long rates dropped and short rates edged up. Read More
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The Yield Curve, June 2010
Since last month, the yield curve has dropped slightly, with both long and short rates ticking down. Read More
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Lending Patterns in Poor Neighborhoods
This study contributes to the characterization of subprime lending in poor neighborhoods by including a spatial dimension to the analysis, in an attempt to capture the social effects of differences in poor and less poor neighborhoods. Read More
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The Yield Curve, May 2010
Since last month, the yield curve has flattened, with long rates falling as short rates barely ticked up. The difference between these rates, the slope of the yield curve, has achieved some notoriety as a simple forecaster of economic growth. Read More
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Has the Mortgage Market Run Out of Steam?
Early last year, the Federal Reserve began purchasing large quantities of mortgage-backed securities (MBS) in a bid to stabilize the housing sector and the secondary market for mortgages. Read More
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A Conference on Consumer Protection in Financial Product Markets
A conference organized by the Federal Reserve Bank of Cleveland engendered an informative discussion of consumer protection in financial products markets. Read More
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The Yield Curve, April 2010
In the past two months, the yield curve has moved up and gotten steeper, with long rates rising a bit more than short rates. Read More
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The Credit Crunch in Commercial Loan Syndication
Commercial lending by banks has fallen to double-digit, negative growth rates, both on- and off-balance-sheet. Read More
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The Yield Curve, February 2010
Since last month, the yield curve has moved up and gotten steeper, with long rates rising a bit more than short rates. Read More
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What Is The Yield Curve Telling Us?...And Should We Have Listened?
A new year has started, and by some reckoning, a new decade, so it may be a natural time to take a look back. Read More
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What Is the Yield Curve Telling Us?...And Should We Have Listened?
new year has started, and by some reckoning, a new decade, so it may be a natural time to take a look back. Read More
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The Yield Curve, December 2009
Since last month, the yield curve has gotten a bit steeper, with long rates moving up as short rates held steady. Read More
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The Dollar Carry Trade
The dollar has depreciated roughly 10 percent from its recent peak in March 2009, on a broad trade-weighted basis against the currencies of our key trading partners. Read More
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Supply and Demand Shocks in Residential Mortgages
The current financial crisis was triggered by severe deteriorations in the U.S. real estate market and sharp increases in mortgage delinquencies and foreclosures, especially among adjustable-rate mortgages issued to subprime borrowers. Read More
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The Yield Curve, November 2009
Since last month, the yield curve has shifted a bit downward and flattened slightly, with long rates dropping a bit faster than short rates. Since last month, the three-month rate has fallen to 0.04 percent (for the week ending November 20). Read More
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The High-Yield Corporate Bond Spread and Economic Activity
Measures of the external finance premium—the difference between the cost of external funds and the opportunity cost of internal funds—may contain valuable information about future economic activity. Read More
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Workshop on Entrepreneurial Finance: A Summary
This Policy Discussion Paper summarizes papers that were presented at the Workshop on Entrepreneurial Finance. Read More
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The Yield Curve, October 2009
Since last month, the yield curve has shifted a bit downward and steepened slightly, with short rates dropping a bit faster than long rates. Read More
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The Yield Curve, September 2009
Since last month, the yield curve has steepened slightly, with long rates edging up as short rates edged down. Read More
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Credit Crises, Money, and Contractions: A Historical View
The relatively infrequent nature of major credit distress events makes a historical approach particularly useful. Read More
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The Yield Curve, August 2009
Since last month, the yield curve has flattened slightly, with long rates dropping a bit more than short rates, which barely changed. Read More
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The Yield Curve, July 2009
Since last month, the yield curve has flattened slightly, with long rates dropping while short rates stayed essentially unchanged. Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow ... Read More
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Ten Myths about Subprime Mortgages
On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated. Read More
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Credit Default Swaps and Their Market Function
The market for credit default swaps is neither transparent nor regulated, perhaps undermining the stability of the financial system it has helped innovate. Read More
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The Yield Curve, June 2009
Since last month, the yield curve has become noticeably steeper, with long rates rising dramatically. The difference between short and long rates, the slope of the yield curve, has achieved some notoriety as a simple forecaster of economic growth. Read More
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Improving Financial Market Conditions and Economic Recovery
After deteriorating sharply in August 2007 and then again in the fall of 2008, financial market conditions have improved markedly during the past quarter. Given the historical relationship between financial market conditions and ... Read More
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The Credit Environment for Business Loans
Some reports have shown evidence of contraction in commercial and industrial (C&I) loans, which could make it difficult for businesses to manage cash flow or finance business expansion. Read More
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The Yield Curve, May 2009
Since last month, the yield curve has shifted up and gotten steeper, with both short and long rates rising. The spread between these rates, the slope of the yield curve, has achieved some notoriety as a simple forecaster of economic growth. Read More
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The Yield Curve, March 2009
Since last month, the yield curve has moved lower and flattened slightly, with long rates dropping a bit more than short rates, though the difference between them remains strongly positive. Read More
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The Yield Curve, February 2009
In the midst of all the depressing news about the economy, the yield curve still might provide a slice of optimism. Read More
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Adjustable-Rate Mortgages and the Libor Surprise
Adjustable-rate mortgages have typically been tied to either of two indexes, one based on U.S. treasuries, the other on the London interbank offered rate, or Libor. Read More
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The Yield Curve, January 2009
New York Times columnist Paul Krugman doesn’t think we should be relying on the yield curve for predictions of economic growth, given the current economic environment. Read More
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Information and Liquidity: A Discussion
I extend and discuss the model of asset liquidity by Lester, Postlewaite, and Wright (2007, 2008). Read More
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The Yield Curve, December 2008
In the midst of the horrendous economic news of the last month, the yield curve might provide a slice of optimism. Read More
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The Yield Curve, November 2008
In the midst of the horrendous economic news of the last month, the yield curve might provide a slice of optimism. Read More
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Business Loan Markets
The Federal Reserve Board’s October 2008 survey of senior loan officers (covering the months of August, September, and October of 2008), found significant tightening of standards for commercial and industrial loans since the last survey. Read More
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Financial Turmoil and Global Growth
The turmoil in world financial markets is impeding global economic growth, according to the International Monetary Fund (IMF). Read More
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More Measures Introduced to Help Financial Markets
On October 8, the Federal Reserve joined with several other central banks to announce reductions in policy interest rates. Read More
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Estimating Real and Nominal Term Structures using Treasury Yields Inflation Inflation Forecasts and Inflation Swap Rates
This paper develops and estimates an equilibrium model of the term structures of nominal and real interest rates. Read More
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The Yield Curve, October 2008
In the midst of the horrendous economic news of the past month, the yield curve might provide a slice of optimism. Read More
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The Yield Curve, September 2008
Since last month, the yield curve has moved lower and gotten steeper, as both short and long-term interest rates fell. Read More
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The Yield Curve, August 2008
Since last month, the yield curve has flattened modestly, with both short-term interest rates increasing and longer rates holding steady. Read More
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The Yield Curve, July 2008
Since last month, the yield curve has taken a parallel downward shift, with both short-term and long-term interest rates falling. Read More
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The Yield Curve, June 2008
Since last month, the yield curve has taken a parallel upward shift, with both short-term and long-term interest rates rising. Read More
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Business Loan Markets
The Federal Reserve Board’s April 2008 survey of senior loan officers (covering the months of January through March 2008) found significant tightening of standards for commercial and industrial loans since the last survey. Read More
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The Yield Curve, May 2008
Since last month, the yield curve has witnessed a parallel upward shift, with both short-term and long-term interest rates rising. Read More
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Bifurcation?
In its April World Economic Outlook, the International Monetary Fund (IMF) lowered its projections for world economic growth. Read More
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Liquidity in Asset Markets with Search Frictions
We develop a search-theoretic model of financial intermediation and use it to study how trading frictions affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. Read More
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Trouble Ahead for Student Loans?
The market for student loans may differ in some respects from other financial markets, but private lenders are the primary source of funds. As in other markets, the incentive to lend those funds comes from the ability to make a profit. Read More
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Mortgage Delinquencies in Fourth District Metropolitan Areas
The U.S. housing market continued to be under considerable stress in the first quarter of 2008. Read More
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The Yield Curve, April 2008
Since last month, the yield curve has gotten steeper, with long-term interest rates rising and short term interest rates falling. Read More
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The Yield Curve, March 2008
Since last month, the yield curve has gotten steeper, with long-term interest rates rising and short-term interest rates falling. Read More
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Home Price Indexes
According to most major measures, home prices are declining—and if market commentators are right, prices may continue to fall in the near future. Read More
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Business Loan Markets
The Federal Reserve Board’s January 2008 survey of senior loan officers (covering the months of October 2007 through December 2007) found considerable tightening of credit standards for commercial and industrial loans since the last survey. Read More
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The Yield Curve, February 2008
Since last month, the yield curve has gotten steeper, with long-term interest rates rising and short-term interest rates falling. Read More
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The Yield Curve, January 2008
Since last month, both long-term and short term interest rates have decreased, with short rates dipping more, leading to a steeper yield curve. Read More
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The Yield Curve, December 2007
Since last month, both long-term and short term interest rates have decreased, with short rates dipping more, leading to a steeper yield curve. Read More
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The Yield Curve, November 2007
Since last month, both long-term and short term interest rates have decreased, with short rates dipping more, leading to a steeper yield curve. Katie Corcoran, Joseph Haubrich, The Yield Curve, November 2007, 11.20.07 Read More
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Business Loan Markets
The Federal Reserve Board’s October 2007 survey of senior loan officers (covering the months of August, September and October), found considerable tightening of standards for commercial and industrial loans. Read More
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Financial Markets: Settling but Cautious
Credit markets have settled a great deal since late summer, when it became starkly apparent that subprime mortgages were much riskier than had been previously thought. Read More
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The Yield Curve, October 2007
Since last month, longer-term interest rates have increased with little movement in short rates, increasing the slope of the yield curve. Read More
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Jumbo Mortgages and Mortgage Market Conditions
Mortgage markets can have a big effect on the economy more generally, as recent turmoil in financial markets—which began with turbulence in the mortgage industry—affirms. Read More
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Head'n South
Dollar exchange rates have recently reached some eye-bulging levels: parity with the Canadian dollar, a record against the euro, and a rate not seen in 25 years against the British pound. Read More
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The Yield Curve, September 2007
Since last month, turmoil in the financial market has shifted the yield curve downward, with short rates falling by more than long rates. Read More
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Prepayment Penalties on Subprime Mortgages
As a result of the subprime mortgage mess, prepayment penalties are under close scrutiny. Read More
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The Yield Curve, August 2007
Since last month, the yield curve has twisted downward, with long rates falling more than short rates. Read More
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Business Loan Markets
The April 2007 Senior Loan Officer survey (covering the months of February, March, and April) revealed a slight increase in credit availability for businesses. Read More
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The Yield Curve, July 2007
Since last month, the yield curve has flattened, with short rates rising and long rates falling. Read More
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The Yield Curve, June 2007
Since last month, the yield curve has steepened considerably, with short rates falling and long rates rising. Read More
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Who Holds the Toxic Waste? An Investigation of CMO Holdings
“Toxic waste” refers to the riskiest derivative structures arising from collateralized mortgage obligations (CMOs). Read More
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Liquidity in Asset Markets with Search Frictions
We study how trading frictions in asset markets affect the distribution of asset holdings, asset prices, efficiency, and standard measures of liquidity. Read More
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The Yield Curve, May 2007
In its limited capacity as a simple forecaster of economic growth, the slope of the yield curve has been giving us a rather pessimistic view for a while now. Read More
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Business Loan Markets
The Federal Reserve Board’s January 2007 survey of senior loan officers (covering the months of November, December, and January), found essentially no change in credit availability for businesses. Read More
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The Yield Curve, April 2007
As mentioned in recent months, the slope of the yield curve has achieved some notoriety as a simple forecaster of economic growth. Read More
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Subprime Statistics
Earlier in March, the Mortgage Bankers Association (MBA) published the results of their quarterly survey on the health of the mortgage market. Read More
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On Forecasting the Term Structure of Credit Spreads
Predictions of firm-by-firm term structures of credit spreads based on current spot and forward values can be improved upon by exploiting information contained in the shape of the credit-spread curve. Read More
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The Yield Curve, March 2007
As mentioned in previous months, the slope of the yield curve has achieved some notoriety as a simple forecaster of economic growth. Read More
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Liquidity
Lately, I’ve been hearing people say that the world is awash in liquidity. Read More
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Limited Liability and the Development of Capital Markets
We study the consequences of the introduction of widespread limited liability for corporations. Read More
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Credit Spreads and Subordinated Debt
Stock and bond prices contain all sorts of information about investors’ beliefs and expectations. Read More
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The Yield Curve, February 2007
The slope of the yield curve has achieved some notoriety as a simple forecaster of economic growth. Read More
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On Government Intervention in the Small-Firm Credit Market and Its Effect on Economic Performance
We empirically test whether the Small Business Administration’s main guaranteed lending program--the 7(a) program--has a greater impact on economic performance in low-income markets than in others. Read More
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Business Loan Markets
For most of the past year the survey of senior loan officers showed that credit availability for businesses continued to improve. Read More
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The Yield Curve, January 2007
The slope of the yield curve has achieved some notoriety as a simple forecaster of economic growth. Read More
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Home Price Derivatives
Until recently, homeowners had no way to protect the value of their homes against losses that could result from housing market downturns. Read More
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Interest Rates, Yields, Outstanding Debt, and Consumer Attitudes
The yield curve remained inverted in December. Read More
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Search in Asset Markets: Market Structure, Liquidity, and Welfare
This paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market. Read More
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The Yield Curve, December 2006
The slope of the yield curve has achieved some notoriety as a simple forecaster of economic growth. Read More
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Money and Financial Markets
We know that correlation does not necessarily imply causation. Read More
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Option Prices, Exchange Market Intervention, and the Higher Moment Expectations Channel: A User’s Guide
This paper investigates how market structure affects efficiency and several dimensions of liquidity in an asset market. Read More
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Moral Hazard in the Diamond-Dybvig Model of Banking
We modify the Diamond-Dybvig model studied in Green and Lin to incorporate a self-interested banker who has a private record-keeping technology. Read More
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Jump Starting GARCH: Pricing and Hedging Options with Jumps in Returns and Volatilities
This paper considers the pricing of options when there are jumps in the pricing kernel and correlated jumps in asset returns and volatilities. Read More
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Business Loan Markets
Credit availability for businesses improved at a slower rate in 2006:IIIQ, according to the Federal Reserve’s Senior Loan Officer Opinion Survey. Read More
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Money and Financial Markets
Although they have trended up from their 2003 trough, long-term interest rates remain low by historical standards. Read More
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Small Firm Credit Market Discrimination, SBA-Guaranteed Lending, and Local Market Economic Performance
We empirically test whether SBA-guaranteed lending has a greater impact on economic performance in markets with a high percentage of potential minority small businesses. Read More
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Money and Financial Markets
Interest rates have dropped slightly over the past month, but the yield curve continues its inversion (short rates higher than long ones), with a curious peak at the six-month maturity. Read More
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Forecasting with the Yield Curve: Level, Slope, and Output 1875-1997
Using the yield curve helps forecast real growth over the period 1875 to 1997. Using both the level and slope of the curve improves forecasts more than using either variable alone. Read More
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Money and Financial Markets
Throughout the summer, the 10-year Treasury note yield has been below that of the one-year Treasury bill, implying an inverted yield curve in that range of maturities. Read More
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Mortgage Lending
Mortgage bankers originated $590 billion of new mortgages in 2006:IQ and $633 billion in 2006:IIQ, the lowest first- and second-quarter increases since 2002. Read More
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Business Loan Markets
For most of the past year, the Federal Reserve Board’s Senior Loan Officer Survey has shown continued improvement in credit availability for businesses. Read More
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Money and Financial Markets
Although long-term interest rates have trended upward from their 2003 trough, they remain low by historical standards. Some view this as the consequence of a savings glut in developing countries, especially in Asia. Read More
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Money and Financial Markets
The inversion of the yield curve observed earlier this year has nearly disappeared. Read More
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Business Loan Markets
Credit availability for businesses continued to improve in 2005 and early 2006, according to the Federal Reserve’s Senior Loan Officer Survey. Read More
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Money and Financial Markets
Market participants now place nearly even probabilities on a pause and a 25 bp funds rate hike in June. Federal funds futures foretell a further 50 bp increase in the funds rate by the end of October. Read More
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Money and Financial Markets
Long-term interest rates remain low by historical standards, posing something of a conundrum. Read More
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Business Loan Markets
Credit availability for businesses continued to improve in 2005, according to the Federal Reserve’s Senior Loan Officer Survey. Read More
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Money and Financial Markets
The recent flattening of the yield curve has generated significant controversy. Read More
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The Return to Capital and the Business Cycle
Real business cycle models have difficulty replicating the volatility of S&P 500 returns. Read More
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Money and Financial Markets
Implied yields on Eurodollar futures show that market participants expect a pause in policy tightening in 2006. Read More
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Small-Firm Credit Markets, SBA-Guaranteed Lending, and Economic Performance in Low-Income Areas
SBA guaranteed-lending programs are one of many government-sponsored market interventions aimed at promoting small business. Read More
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Money and Financial Markets
Despite 12 straight increases in the federal funds rate, long-term interest rates remain low by historical standards. For more than three years, the economy has been expanding at an average annual rate of 3.5%. Read More
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Money and Financial Markets
The federal funds rate directly affects only the reserve desks of banks and a few brokers and dealers; however, as a transmitter of Federal Reserve policy, it influences other rates of wider concern. Read More
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International Markets
In September, the International Monetary Fund (IMF) published its second biannual World Economic Outlook, which predicted that world GDP would grow 4.3% in 2005 as well as 2006. Read More
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Business Loan Markets
Credit availability for businesses continued to improve in 2004, according to the Federal Reserve’s Senior Loan Officer Survey. A positive net percentage indicates more banks reported higher standards than reported no change or easing standards. Read More
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Money and Financial Markets
Implied yields from euro-dollar futures fell in August and September, suggesting that market participants expect the current round of tightening may end or moderate significantly in 2006. Read More
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The Renminbi Revaluation
On July 21, China devalued renminbi 2.1% to 8.11 per U.S. dollar and revised its exchange rate policy. Since then, renminbi has not changed much relative to the dollar, suggesting this revaluation may not be first in a near-term series. Read More
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Money and Financial Markets
In a recent speech, Federal Reserve Board Governor Donald Kohn noted that the Federal Reserve pays “a lot of attention to financial market prices in the formulation of monetary policy.” Read More
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Money and Financial Markets
Although the Federal Reserve sets the federal funds rate and the discount rate, the ultimate impact on the economy depends on what happens to other interest rates, which policy may influence but not control. Read More
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Oil Prices
In March 2005, the U.S. imported 65% of all the oil it consumed. About 30% of those imports came from its immediate neighbors: 16% from Mexico and 14% from Canada. Slightly more than two-thirds of U.S. oil imports came from five countries. Read More
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Business Loan Markets
Credit availability for businesses continued to improve throughout 2004, according to the Federal Reserve’s Senior Loan Officer Survey. Read More
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Money and Financial Markets
The secular decline in long-term rates that began in 1982 resulted primarily from a decline in the inflation expectations associated with a sustained disinflation. Read More
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The Eurosystem Money Market Auctions: A Banking Perspective
This paper analyzes the individual bidding behavior of German banks in the money market auctions conducted by the ECB from the beginning of the third quarter of 2000 to the end of the first quarter of 2001. Read More
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Money and Financial Markets
Before January 9, 2003, the Federal Reserve discount rate was set lower than the FOMC’s federal funds rate target for open market operations. The Reserve Banks had to use administrative means to discourage borrowing at this attractive rate. Read More
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SBA-Loan Guarantees and Local Economic Growth
Increasingly policymakers are looking to the small business sector as a potential engine of economic growth. Read More
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Business Loan Markets
Credit availability for businesses continued to improve for most of 2004, according to the Senior Loan Officer Survey. Read More
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Money and Financial Markets
In his February 16 testimony before Congress, Federal Reserve Chairman Greenspan discussed yield curve movements. Changes at the long end of the nominal yield curve can be attributed: changes in real rates and changes in inflation expectations. Read More
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International Transactions
The current account balance measures the combined balance on international trade, net foreign investment income, and net unilateral transfers to foreigners. Read More
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Money and Financial Markets
The federal funds rate gets attention, not because everyone borrows or lends at that rate (only banks do), but because its movement affects other rates at which people do borrow and lend. Read More
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Money and Financial Markets
In recent months, yields on 10-year Treasury inflation-protected securities (TIPS) have fallen more than yields on nominal 10-year Treasury notes. Read More
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Money and Financial Markets
On September 21, the Federal Open Market Committee (FOMC) raised the target federal funds rate to 1.75%, 25 basis points (bp) higher than the target established on August 10. Read More
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Mortgage Lending
Mortgage bankers originated $848 billion of new mortgages in 2004:IIQ, partially reversing the slump that began in 2003:IVQ but falling far short of the $1.2 trillion peak reached in the third quarter of the same year. Read More
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Money and Financial Markets
Financial markets offer one way to gauge the degree of accommodation in monetary policy (and perhaps to judge whether it is removed at “a pace that is likely to be measured” in the future). Read More
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International Trade and Transactions
In June, the U.S. trade deficit in goods and services grew by a record $8.9 billion to reach $55.8 billion. Read More
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Money and Financial Markets
An inflation-adjusted overnight interest rate near or below zero is not thought to be sustainable without ultimately inducing inflationary pressures. Read More
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Money and Financial Markets
The May 4 statement of the Federal Open Market Committee noted the “accommodative stance of monetary policy.” Read More
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International Trade and Transactions
The current account deficit has been increasing for the past 12 years. In 2004:IQ, the current account deficit fell to 5.1% of GDP. Read More
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Interest Rates, Yield Curves, and the Monetary Regime
The yield curve has a wealth of information about future interest rates and economic conditions. Read More
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Money and Financial Markets
One reason the federal funds rate gets such intense scrutiny, even though few people directly borrow and lend at that rate, is that Federal Reserve policy affects other rates as well. Read More
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The Yield Curve, Recessions, and the Credibility of the Monetary Regime
This paper brings historical evidence to bear on the stylized fact that the yield curve predicts future growth. Read More
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Money and Financial Markets
Market participants’ inference that the FOMC has leeway to be patient is consistently reflected throughout the term structure of interest rates. Read More
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Dividends
In recent years, there has been increasing pressure on U.S. corporations to distribute earnings to shareholders in the form of dividends. Read More
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Mutual Funds, Fee Transparency, and Competition
Mutual funds enable small, less experienced investors to hold diversified portfolios of stocks and bonds at relatively low cost. Read More
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Money and Financial Markets
After declining strongly from late 2000 to mid-2003, interest rates on three- and six-month Treasury bills have remained nearly constant at values close to the federal funds rate. Read More
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Money and Financial Markets
At its January 27–28 meeting, the Federal Open Market Committee (FOMC) left the federal funds rate target unchanged at 1% and the primary credit rate at 2%. Read More
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FDIC-Insured Commercial Banks
In 2003:IIIQ, FDIC-insured commercial banks’ net operating income improved on the previous quarter and recovered strongly from its dip in 2002:IVQ. Read More
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Arbitrage: The Key to Pricing Options
Arbitrage has become associated in popular attitudes with the most ruthless and profit-driven of human impulses, but the opposite reputation might be more well-deserved. Read More
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International Markets
The U.S. dollar continues to decline, particularly against other major currencies. Read More
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Money and Financial Markets
Much of the current discussion about monetary policy focuses on the prospects for inflation—what do financial market indicators say? Read More
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Capital Trading, Stock Trading, and the Inflation Tax on Equity: A Note
In "Capital Trading, Stock Trading, and the Inflation Tax on Equity," Chami, Cosimano, and Fullenkamp (2001) (hereafter, CCF) analyze a cash-in-advance model in which capital goods are explicitly traded. Read More
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Money and Financial Markets
The recent financial environment, in which the overnight real interest rate has been near zero, was initially associated with a general decline in interest rates across all maturities. Read More
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On Credit Spread Slopes and Predicting Bank Risk
We examine whether credit-spread curves, engendered by a mandatory subordinated-debt requirement for banks, would help predict bank risk. Read More
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The Empirical Performance of Option-Based Densities of Foreign Exchange
In this paper, we calculate risk-neutral densities (RND) by estimating the daily diffusion process of underlying futures contract for foreign exchange, based on the price of the American puts and calls reported on Chicago Mercantile Exchange. Read More
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The Forecasting Performance of German Stock Option Densities
In this paper we will be estimating risk-neutral densities (RND) for the largest euro area stock market (the index of which is the German DAX), reporting their statistical properties, and evaluating their forecasting performance. Read More
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Expensing Stock Options
Many market commentators argue that companies should expense the stock options they give their employees. Will expensing give investors better information about what companies earn and spend? Read More
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Money and Financial Markets
Short-term interest rates have been trending downward since late 2000, moving roughly in tandem with changes in the federal funds rate. Read More
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Bubble, Toil, and Trouble
Not everyone believes bubbles occur in stock markets. Many economists do, but others think something else is happening during periods of rapidly rising and plummeting stock prices. Read More
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Pricing Kernels, Inflation, and the Term Structure of Interest Rates
We estimate a discrete-time multivariate pricing kernel for the term structure of interest rates, using both yields and inflation rates. Read More
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Money and Financial Markets
At its September 16 meeting, the Federal Open Market Committee (FOMC) did not change either the federal funds rate target (1%) or the primary credit rate (2%). Read More
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Information Gathering by a Principal
In the standard principal-agent model, the information structure is fixed. Read More
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Money and Financial Markets
The yield curve has steepened since last month, but this change represents more than a bounce-back from the summer’s exceptionally low longterm rates; current yields show an increase over April and May as well. Read More
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Securitization
Obscure just 20 years ago, the securitization of loan portfolios by private and government-sponsored enterprises is a $5 trillion business today. This Commentary explains why the use of asset-backed securities has grown so spectacularly. Read More
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Money and Financial Markets
The trajectory of expected future policy actions has changed dramatically since the beginning of summer. Read More
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Financial System Structure and Economic Development: Structure Matters
This paper investigates how the structure of a financial system-whether it is bank or market oriented-affects economic growth. Read More
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Money and Financial Markets
Options on federal funds futures have traded on the Chicago Board of Trade since March 2003. Read More
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International Markets
Stock prices in the U.S. have increased since the beginning of the year, as measured by three broad indexes. Read More
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Money and Financial Markets
Although financial headlines announce changes in the target federal funds rate, the nature of those changes cannot be appreciated without understanding their effect on the money supply. Read More
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Monitoring and Controlling Bank Risk: Does Risky Debt Serve Any Purpose?
We examine whether mandating banks to issue subordinated debt would serve to enhance market monitoring and control risk taking. Read More
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Information and Prices
Information problems pervade the economy. This Commentary describes the challenges they create and the clever solutions markets find to overcome them. Read More
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International Markets
The Broad Dollar Index includes the currencies of 26 countries or regions that had a share of at least 0.5% in U.S. non-oil imports or nonagricultural exports in 1997. Read More
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Money and Financial Markets
While the Federal Reserve controls several nominal interest rates, the real economy is affected by real rates, that is, rates adjusted for inflation. Read More
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Money and Financial Markets
The yield curve’s upward slope suggests that liquidity is adequate for economic expansion. Read More
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Why Are TIIS Yields So High? The Case of the Missing Inflation-Risk Premium
Treasury inflation-indexed securities are just like nominal Treasuries, except that their coupon and principal payments are indexed to inflation. Read More
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Money and Financial Markets
At the short end of the maturity spectrum, interest rates tend to follow the federal funds rate closely. Read More
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Measures of Corporate Earnings: What Number is Best?
Revelations of corporate fraud in 2002 shook the public’s confidence in financial reporting and led to calls for reform. Read More
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Money and Financial Markets
As a tool of monetary policy, changing interest rates is only the means to an end. One (some would say the only) goal of monetary policy is low, steady inflation. How can we tell if monetary policy is on track for that a goal? Read More
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Money and Financial Markets
The sharp decline in interest rates over the past two years reduced the opportunity cost of holding monetary instruments nearly to zero. Read More
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Getting the Most Out of a Mandatory Subordinated Debt Requirement
Recent advances in asset pricing-the reduced-form approach to pricing risky debt and derivatives-are used to quantitatively evaluate several proposals for mandatory bank issue of subordinated debt. Read More
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International Markets
The difference between the 10-year and two-year government bond yields is a measure of the steepness of the yield curve. For the U.S., Canada, the U.K., and the ECU, yield curves were all quite flat in late March and early April. Read More
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Money and Financial Markets
Toward the end of October, the yield curve became slightly inverted, with the six-month Treasury bill yield falling below the three-month yield. This inversion probably was driven by expected cuts in the federal funds rate. Read More
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Money and Financial Markets
The spread between corporate and government interest rates typically rises during recessions and then declines when the recovery gets under way. Read More
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Options and the Future: What Do Markets Think?
We’re used to hearing analysts make predictions about where the economy is headed based on changes in the prices people are paying for stocks, futures, or other assets. Read More
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Money and Financial Markets
The Federal Open Market Committee’s August 13 statement indicated that the balance of risks for the economy tilted toward economic weakness, a change from its previous statement that economic weakness and inflation were evenly balanced. Read More
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International Trade
In June, the U.S. trade deficit—the difference between exports and imports of goods and services—fell $0.7 billion to $37.2 billion. Read More
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International Markets
The Broad Dollar Index measures the average change in the dollar’s exchange rate against the currencies of our 36 most important trading partners. Read More
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Stock Prices and Output Growth: An Examination of the Credit Channel
When stock market values fall, we know it means investors expect lower economic growth in the future. But can stock market declines actually affect future growth? There is some evidence that they can—through the credit channel. Read More
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Money and Financial Markets
The drop in short-term interest rates over the past 18 months sharply reduced the opportunity cost of holding monetary assets. Consequently, the demand for money, as measured by M2, rose sharply in 2001. Read More
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Money and Financial Markets
In June, long-term Treasury rates dropped markedly, more than 20 basis points in the case of the 10-year Treasury. Read More
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U.S. International Transactions
Data for 2002:IQ show a sizeable increase in the U.S. current account deficit, from $95.1 billion in 2001:IVQ to $112.5 billion. Read More
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Money and Financial Markets
Because price stability is a long-run goal of the Federal Reserve System, monetary policy’s effect on inflation is always a major concern. Read More
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International Trade
In February, the U.S. deficit on goods and services rose $3.3 billion to reach $31.5 billion, mostly because imports increased $4.2 billion. Read More
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Money and Financial Markets
Annualized productivity growth in 2001:IVQ, which recently was revised upward from 3.5% to 5.2%, was surprisingly strong. Read More
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Market- vs. Bank-Based Financial Systems: Do Investor Rights Really Matter?
Why are common-law countries market-dominated and civil-law countries bank-dominated? This paper provides an explanation tied to legal traditions. Read More
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Foreign Exchange and Interest Rates
Although the dollar has been weakening against the euro since early 1996, the euro/dollar exchange rate is currently near its level of a year ago. Read More
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Money and Financial Markets
Growth in the broad monetary aggregates appears to have slowed considerably during January 2002. Read More
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Money and Financial Markets
In 2001, the monetary aggregates grew rapidly across the entire spectrum of liquidity. Read More
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Money and Financial Markets
Although headlines about monetary policy mostly announce changes in the target federal funds rate, the nature of those changes cannot be appreciated without looking at their effect on the money supply. Read More
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U.S. International Transactions
The U.S. current account deficit decreased from $107.6 billion in 2001:IIQ to $95 billion in 2001:IIIQ, mainly because of a decline in the deficit on goods and services. Read More
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Swaps and the Swaps Yield Curve
Interest rate swaps have become a popular financial derivative, and market watchers and economists are paying closer attention to them and their associated yield curves Read More
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Money and Financial Markets
Many interest rates have fallen to their lowest levels in 30 years (except for a brief period in 1998 after the Asian financial crises and the Russian default). The benchmark effective federal funds rate averaged just 2.49% in October. Read More
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International Financial Markets
The yen/dollar and euro/dollar exchange rates, which fell sharply soon after September 11, have largely recovered. Read More
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Money and Financial Markets
Short-term Treasury yields plummeted immediately after the September 11 terrorist attacks and have declined further since then, at least for maturities longer than three months. Read More
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A Strategic Approach to Hedging and Contracting
This paper provides a new rationale for hedging that is based, in part, on noncompetitive behavior in product markets. We identify a set of conditions which imply that a firm may want to hedge. Read More
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The U.S. Demographic Transition Perfect Capital Markets
Between 1800 and 1940 the United States went through a dramatic demographic transition. In 1800 the average woman had seven children, and 94 percent of the population lived in rural areas. Read More
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Money and Financial Markets
At least since Walter Bagehot’s day in the late 1800s, the classic advice to central banks in real or incipient financial crises has been to “lend freely”—in modern parlance, to supply liquidity. Read More
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International Transactions
During the first half of 2001, the U.S. current account deficit narrowed $39.3 billion (annual rate) from its record $465.3 billion in 2000:IVQ. Read More
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Who Benefits from Increasing the Federal Deposit Insurance Limit?
Who might stand to benefit from doubling the insured-deposit limit to $200,000, and are such benefits consistent with the social objectives of federal deposit insurance? Read More
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Will the Valuation Ratios Revert to their Historical Means ?Some Evidence from Breakpoint Tests
If valuation ratios return to their historical means any time soon, then equity prices must fall substantially, or earnings and dividends must accelerate sharply, or some combination of these events must occur. Read More
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Money and Financial Markets
Despite the Federal Open Market Committee’s aggressive three percentage-point reduction in the intended funds rate since January, hopes for an incipient resurgence in economic activity appear to be slipping. Read More
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Federal Home Loan Bank Lending to Community Banks. Are Targeted Subsidies Necessary?
The Gramm-Leach-Bliley Act of 1999 amended the lending authority of the Federal Home Loan Banks to include advances secured by small enterprise loans of community financial institutions. Read More
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Money and Financial Markets
Monetary Policy Report that Federal Reserve recently submitted to Congress includes an updated set of economic projections from Board of Governors and Federal Reserve Bank presidents, all of whom participate in deliberations of FOMC. Read More
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Money and Financial Markets
Have we gone too far? Or is this just a beginning? Some consider the actions of the Federal Open Market Committee (FOMC) during the current economic slowdown fully consistent with the quest for maximum long-term real growth through low inflation. Read More
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Migration of Graduates
Developing a highly skilled workforce is often the justification for state spending on high school and higher education programs, but those education dollars do not necessarily translate directly into a better-educated workforce in that state. Read More
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Money and Financial Markets
Interest rates fell across the entire maturity spectrum last winter, when incoming data revealed an abrupt weakening in economic conditions. Read More
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Saving, Investment, and International Financial Flows
Necessary counterpart to our enormous current account deficit is an inflow of foreign savings. Over past decade, our current account deficit has generally reflected strong U.S. investment opportunities rather than American consumers’ profligacy. Read More
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International Transactions and Statistical Discrepancy
No current account deficit can exist without an equal inflow of foreign investment funds. Practically speaking, however, the measurement of trade and financial flows is difficult and often incomplete. Read More
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Foreign Exchange Rates
The S&P 500 has declined 18% in the past year, and the NASDAQ has fallen 52%. One might expect foreign investors to have liquidated some of their U.S. holdings and reinvested the proceeds abroad. Read More
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Commercial Bank Lending to Small Businesses
U.S. Small Business Administration Office of Advocacy reports in 1999, small businesses with less than 500 workers employed 53% of private nonfarm workforce, made 47% of all U.S. sales, and were responsible for 51% of private gross domestic product. Read More
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Money and Financial Markets
Starting in mid-1999, the intended federal funds rate first was raised from 4.75% to 6.5% in six steps and then was cut sharply to 4.5% in four moves of 50 basis points (bp) each. Read More
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Why Is the Dividend Yield So Low?
The dividend yield on stocks has dropped sharply over the last decade. Is its drop reflective of irrational exuberance, as some have claimed? This Commentary assesses alternative explanations for the diminished dividend yield. Read More
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Money and Financial Markets
The March 20 reduction of the federal funds rate target (from 5.50% to 5.00%) has not quelled discussion on the appropriateness of monetary policy. Read More
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Sharing with a Risk-Neutral Agent
In the standard solution to the principal-agent problem, a risk-neutral agent bears all the risk. The author shows that, in fact, multiple solutions exist, and often the risk-neutral agent is not the sole bearer of risk. Read More
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Market- vs. Bank-Based Financial Systems: Do Investor Rights Really Matter?
Why are common-law countries market-dominated and civil-law countries bank-dominated? This paper provides an explanation tied to legal traditions. Read More
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Money and Financial Markets
Growth in the broad monetary aggregates accelerated sharply in January. Annualized year-to-date M2 growth reached 10.2% and annualized year-to-date M3 growth hit a remarkable 13.2%. Read More
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Money and Financial Markets
Now that 2000 is history, we can put its monetary and financial developments into perspective and, at the same time, use them to illuminate the current state of the economy. Read More
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A Retrospective On The Stock Market in 2000
Should the end of the bull market have come as a surprise? Read More
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Interest Rates
As 2000 closed, the yield curve was inverted, with a 3-year, 3-month spread of –78 basis points (bp) and a 10-year, 3-month spread of –74 bp. The inversion’s proximate cause was an increase in short rates combined with a decrease in long rates. Read More
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Interest Rates
The yield curve remains inverted, having shifted down over the past month. The 3-year, 3-month spread has widened from –52 to –65 basis points (bp), and the 10-year, 3-month from –62 to –70 bp. Read More
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Operating Balances
Banks’ operating balances on deposit at Federal Reserve Banks have been declining over most of the past decade. Read More
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Gold
For those who think it is the “only real money” as well as those who, with Lord Keynes, consider it a “barbarous relic,” gold retains its fascination. Read More
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Exchange Rates
Since June, the euro has continued its slide against the dollar, but many of the reasons cited for its decline fail a simple test. Read More
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International Interest Rates
The euro, which previously made headlines when it declined against the dollar, has recently made headlines again, this time because the G-7 nations intervened on its behalf and the Danes decided not to adopt it. Read More
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Interest Rates
The yield curve has inverted further since last month, with yields on maturities of two years and above falling, and those below two years rising. Read More
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Interest Rates
What is the best way to illustrate interest rate movements? Read More
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Foreign Lending Exposure
U.S. banks’ loans to developing countries have not yet returned to their early-1997 levels, probably because of these countries’ economic weakness as well as more favorable prospects for economic growth elsewhere. Read More
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Anatomy of a Fair-Lending Exam: The Uses and Limitations of Statistics
(Revised) In this paper, we consider the role of statistical analysis in fair-lending compliance examinations. Read More
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Interest Rates
The yield curve has shifted downward at all maturities since last month. Read More
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Interest Rates
Over the past month, the yield curve shifted higher while retaining its humped shape, with short and long rates lower than medium-term rates. Read More
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Savings, Investment, and Foreign Capital
Proponents of the “new economy” laud our recent strong economic performance as evidence of a sustainable increase in the underlying growth potential of the U.S. Read More
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International Market Volatility
The day-to-day volatility of U.S. equity markets has increased markedly this year. Read More
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Interest Rates
Do interest rates tell us if inflation— or expected inflation—has increased? Read More
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Interest Rates
The yield curve continues to show a humped shape, with long rates falling since last month. Read More
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International Trade
The U.S. trade deficit in goods and services reached a new record of $28 billion in January 2000. Read More
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Yield Curves
Strong economic growth in the U.S. has produced a federal budget surplus for the second consecutive year: $124 billion for fiscal year 1999 on the heels of 1998’s $69 billion surplus. Read More
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Interest Rates
Unlike most, this month’s yield curve cannot be described as either flatter or steeper than last month’s. Read More
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Interest Rates
The yield curve has moved upward and steepened since last month. Read More
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Gold Prices
Gold prices have fallen precipitously since their recent highs of February 1996, largely because of central banks’ actions. Read More
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Effective Dollar Exchange Rates
During 1999, the U.S. dollar depreciated against the Japanese yen, appreciated against most European currencies, and held steady against its Canadian counterpart. Read More
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Interest Rates
Over the course of 1999, the yield curve moved higher and steepened, resuming its normal upward slope from a position of relative flatness at the end of 1998. Read More
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New Results on the Rationality of Survey Measures of Exchange-Rate Expectations
In light of research questioning the usefulness of economists’ models of exchange-rate determination, this paper investigates the rationality of survey measures of expectations for deutsche mark/dollar exchange rates for 1989-97. Read More
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Currency Portfolios and Nominal Exchange Rates in a Dual Currency Search Economy
We analyze a dual currency search model in which agents are allowed to hold multiple units of both currencies. Hence, agents hold portfolios of currency. Read More
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Interest Rates
The long end of the yield curve has shifted downward slightly since last month, whereas the short end has shifted upward. Read More
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Real Exchange Rates
The exchange rates reported in newspapers’ financial sections aren’t real. Read More
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Interest Rates
Since last month, the yield curve has shifted upward and marginally decreased its upward tilt. Read More
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Interest Rates
What a difference a year makes! One year ago, financial markets were still reeling from the Asian crisis, the Russian default, the collapse of Long Term Capital Management, and the associated flight to quality and liquidity. Read More
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Term Structure Economics from A to B
The interest rates for bonds of different maturities are related, but the interplay of factors that influence these rates is not easy to tease apart. Read More
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Interest Rates
One closely watched interest-rate spread has been making news lately as it moves to historically high levels. Read More
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The Recent Ascent in Stock Prices: How Exuberant Are You?
It has been almost three years since Chairman Greenspan posed the foregoing question and thereby launched the phrase “irrational exuberance” into the economic idiom. Read More
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Interest Rates
The yield curve has flattened slightly since last month. Short rates have fallen a mere nine basis points, but long rates have fallen more ... Read More
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Interest Rates
Since last month, interest rates have risen across the board, with a surge in long rates steepening the yield curve. Read More
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Interest Rates
Since April, the yield curve has shifted upward and steepened, but it remains fairly flat by historical standards. Read More
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Interest Rates
The yield curve has not moved much since last month. Both the 3-month and 30-year yields remain unchanged at 4.51% and 5.58%, respectively. Read More
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Accounting for Capital Consumption and Technological Progress
Methods currently used to calculate capital consumption, the capital stock, and the sources of economic growth do not adequately measure the underlying growth in inputs due to technological advance. Read More
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Interest Rates
The yield curve has steepened since last month, as 3- and 6-month rates fell and all others rose. Read More
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Interest Rates
Interest rates at all maturities have moved up sharply since last month. Some of the increase can be traced to speculation that the Federal Reserve will increase the federal funds rate. Read More
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Interest Rates
The yield curve remains rather flat, having shown little movement since last month. At the long end, rates on 30-year bonds increased a scant six basis points; at the short end, three-month rates dropped three basis points. Read More
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Interest Rates
The new year begins with interest rates noticeably below their levels at the start of 1998. Read More
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Interest Rates
Over the past month, interest rates on Treasury securities have shifted higher across the board. Read More
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Housing Finance
The recent turmoil set off by uncertainty in world financial markets has proven a great boon to people seeking to buy homes or refinance their mortgages. Nevertheless, it has been a wild ride. Read More
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Interest Rates, Spreads, and Volatility
In the bond market, at least, the last few months provide strong reasons for calling 1998 “the year of the spread.” Read More
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Interest Rates
The yield curve has continued to move down and flatten, showing an inversion at some rates. Read More
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Interest Rates
All along the maturity spectrum, interest rates have moved lower in the past month. Longer rates fell the most, however, producing a noticeable flattening of the yield curve. Read More
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Interest Rates
The yield curve has moved only slightly since last month, the biggest shift being a decrease of 11 basis points in the 6-month yield. Read More
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Self-Selection and Discrimination in Credit Markets
In this paper we make two contributions toward a better understanding of the causes and consequences of discrimination in credit markets. Read More
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Interest Rates
In the past several months, the yield curve has flattened noticeably, with the benchmark 10-year, 3-month and 3-year, 3-month spreads decreasing from 70 to 40 basis points and from 64 to 46 basis points. Read More
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Is the Stock Market Overvalued?
With the Standard and Poor’s 500 still near the record highs set earlier this year, analysts and investors alike are asking, “Are stock prices too high?” To answer this question, two adjustments are useful. Read More
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Gold Prices
Gold prices have begun to rebound in 1998, reversing the downward trend that began nearly two years ago. Read More
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Interest Rates
The yield curve remains relatively flat; short rates have moved up and long rates have moved down since last month. Read More
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The Stock Market
The U.S. stock market continues to amaze most observers. Early April was characterized by a number of record highs for the major stock indexes, including the S&P 500. Read More
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Housing Finance
After dropping more than 100 basis points through the last three quarters of 1997, long-term mortgage rates have remained relatively steady at around 7% since January. Read More
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Interest Rates
The yield curve has shifted only slightly in the last month. At the short end, the 3-month rate has moved down just 14 basis points, while at the long end, the 30-year rate has increased only 10 basis points. Read More
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Equity Prices
The stock market is again hitting new highs almost daily. Some analysts think this means a bubble is about to burst, while others believe it heralds a “new economy” of strong growth with low inflation. Read More
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Interest Rates
The yield curve remains flat relative to its historical shape, with the benchmark 3-year, 3-month and 10- year, 3-month spreads at 40 and 44 basis points, respectively. Read More
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Gold Prices
This January marked the 150th anniversary of a major event in American history: the discovery of gold at Sutter’s Mill, California. Read More
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The TED Spread
With Southeast Asia’s financial woes looming large in the minds of economists, the TED spread—the difference between interest rates on Treasury securities and Eurodollar instruments of the same maturity ... Read More
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Interest Rates
The yield curve has shifted up a bit since last month, with most of the change coming at the short end. It is also somewhat bumpier than usual, with 7-year rates above 10-year rates. Read More
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Large Shareholders and Market Discipline in a Regulated Industry: A Clinical Study of Mellon Bank
The change in control at Mellon Bank in 1987 sheds a unique light on several aspects of corporate control, because Mellon was one of only a few banks with a large shareholder. Read More
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Interest Rates
Since last month, the yield curve has flattened and shifted downward. The spread between the 3-year Treasury note and the 3-month T-bill narrowed from 43 basis points to 21 basis points. Read More
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Interest Rates in the 1920s
The prolonged bull market has renewed investors’ curiosity about the 1920s, as many recall George Santayana’s warning that those who cannot remember the past are condemned to repeat it. Read More
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The Stock Market
After climbing more than 25% between January and July 1997, the S&P 500 index swung widely over the balance of the year. Read More
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Gold Markets
Gold prices have continued to slide, hitting $290 per ounce on December 22. Since February 1996, the price has fallen more than $115, with $34 of that amount coming in the last two months. Read More
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Interest Rates
The yield curve flattened again last month as long rates continued to drop. Read More
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Gold Prices
The price of gold has declined through most of 1997, dipping below $300 per ounce in early December. While industrial and jewelry demand remains high, central bank sales more than offset it. Read More
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Interest Rates
The yield curve has flattened since last month, with short rates up and long rates down. Read More
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The Stock Market Correction
On October 27, the S&P 500 index plummeted 64.62 points, a percentage loss of 6.86%. This was the largest point drop in a single day, and the seventeenth largest percentage drop since the S&P index started in 1926. Read More
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Hong Kong Financial Markets
The financial tremors that shook Southeast Asia this summer left the Hong Kong dollar relatively unrattled. Read More
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Interest Rates
The yield curve has flattened since last month, with rates falling for Treasuries with maturities of one year or longer, and rising for those of less than a year. Read More
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Stock Market Volatility
Although the stock market has risen sharply over the last three years, a casual examination indicates a bumpier path since the middle of 1996. Read More
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Interest Rates
In September, the yield curve on government securities moved noticeably lower (about 20 basis points), but retained its general shape. The weekly average of the 3-month constant-maturity series moved below 5%. Read More
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The Dark Side of Liquidity
Lord Byron once wrote that “ready money is Aladdin’s lamp.” And who can deny that liquidity—having enough ready cash to pay your debts when they come due—is a good thing? Read More
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Absolute Priority Rule Violations, Credit Rationing, and Efficiency
Violations of the absolute priority rule (APR) are commonplace in private workouts, formal business reorganizations, and personal bankruptcies. Read More
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Financing the Investment Boom
The current expansion has been characterized by an extraordinary advance in business investment, financed through both strong cashflow and substantial consumption borrowing. Read More
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Interest Rates
The yield curve has steepened since the end of July, with long rates increasing about 20 basis point (b.p.) and the 3-month short rate inching up only four b.p. Read More
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Housing Finance
Until recent weeks, mortgage interest rates had been on a steady downward trend, with 30-year rates falling to 7.37% at the end of July (their lowest level since March 1996). Read More
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Gold Futures, January 1980 - July 1997
Both spot and futures prices of gold have been declining fairly steadily since March, dropping to levels not seen since the first months of 1993. Read More
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Interest Rates
The yield curve has flattened since last month, with long rates falling and short rates rising. Read More
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TIPS for Safer Investing
Inflation - a persistent increase in the price level- threatens people's financial well-being by reducing the purchasing power of money. Read More
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Interest Rates
The yield curve has flattened noticeably since last month. Although rates have fallen at all maturities, longer rates have dropped, tightening up spreads. Read More
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The Recent Ascent of Stock Prices: Can It Be Explained by Earnings Growth or Other Fundamentals?
An analysis of the current relationship between stock prices, dividends, earnings, and returns, aimed at examining the causes of the recent stock market surge. Read More
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Gold Markets
Having long ago settled down after the turmoil of the early 1980s, gold prices have continued to decline steadily from their recent peak of February 1996, as have prices on the futures market. Read More
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Interest Rates
Since April, interest rates have shifted downward. Read More
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Secondary Mortgage Market Activity
Mortgage originators tend to sell their fixed-rate loans to secondary-market agencies, while holding their adjustable-rate mortgages in their portfolios. Read More
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Interest Rates
The yield curve has steepened slightly since last month, with short rates falling and long rates rising. Read More
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The Stock Market
The bull market of 1996-97 continues to garner headlines. The standard graphs may exaggerate recent gains, however, because they do not take account of the market's previous run-up. Read More
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Interest Rates
Since last month, the yield curve has shifted upward in a parallel fashion, with most of the increase following a rise of 25 basis points in the federal funds rate. Read More
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Credit Rationing, Bankruptcy Cost and the Optimal Debt Contract for Small Business
This paper examines whether the costly random verification scheme affects the optimal debt contract for small business. Read More
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Interest Rates
Since last month, the yield curve has flattened slightly, with very little movement except at the long end. Read More
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Housing Finance
After declining steadily since September 1996, 30-year fixed mortgage rates have jumped 40 basis points from December's low of 7.38%. Read More
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Interest Rates
Interest rates have moved up since last month, and the yield curve has steepened. Read More
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Stock Market Fundamentals
The Great Bull Market of 1996-97 has caught the attention of stock market professionals and individual investors alike. Read More
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Estimating the Cost of U.S. Indexed Bonds
This paper presents an equilibrium bond pricing model driven by two stochastic factors: the real interest rate and the expected rate of inflation. Read More
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Trust and Investment Corporations in China
Trust and investment corporations (TICs) have played a very important role in China’s economic reform. Read More
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The Stock Market
Although volatile, stock prices have been trending upwards since 1982. The Standard & Poor's (S&P) 500 index stood at 741 on December 31, 21% above it's year-end 1995 level. Read More
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The Stock Market
In recent months, much attention has been given to the stupendous ascent of the stock market. Read More
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Housing Finance
One of the most interesting trends in housing finance throughout the 1990s has been the declining importance of government insurance in the mortgage market. Read More
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Interest Rates
The yield curve on U.S. Treasuries has flattened noticeably since last month, with long rates falling but short rates remaining steady. Read More
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Neighborhood Information and Home Mortgage Lending
In this paper, we empirically examine how information about a neighborhood affects the level of lending activity in it. Read More
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Monitored Finance, Liquidity, and Institutional Investment Choice
When agency problems require that an financial institution monitor the firms that it finances, the private information that it gathers about these firms harms the institution's own liquidity. Read More
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Housing Finance
Although one might expect the general rise in long-term mortgage rates (up over 100 basis points since the beginning of the year) to have dampened the demand for new home loans ... Read More
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Interest Rates
After having spent most of August at lower levels, the yield curve has recently shifted up to where it stood at the end of July. Read More
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Interest Rates
The yield curve has changed little since last month. Read More
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Since last month, the yield curve has shifted up across all maturities and has steepened slightly. Read More
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Secondary Mortgage Market Activity
The rapid rise in interest rates during 1994 led to a marked drop in mortgage purchases by the two major players in the secondary market ... Read More
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The Reduced Form as an Empirical Tool: A Cautionary Tale from the Financial Veil
The reduced-form empirical strategy has been used for over 30 years to test the Modigliani-Miller model of corporate financial structure. Curiously, early tests almost always accepted the model, whereas subsequent tests almost always reject it. Read More
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Housing Finance
Despite the recent jump in 30-year fixed mortgage rates - 45 basis points during the last half of February - housing finance activity has demonstrated strong growth over the last year. Read More
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Interest Rates
Long-term interest rates have increased in the past month, leading to a steepening in the Treasury yield curve. A slight drop in short-term rates also contributed to the rise. Popular explanations for this development vary. Read More
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Interest Rates
Interest rates across the board have come down sharply in the past year, but this drop has not been completely even, as the flattening of the yield curve shows. Read More
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Mortgage Interest Deductibility and Housing Prices
Over the past few years, there have been several proposals for replacing the income tax system with a system based on taxing consumption. Read More
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Inflation and Financial Market Performance
In this paper we investigate the empirical association between inflation and the functioning of an economy's financial system. Read More
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The Yield Curve
The yield curve on Treasury securities - which describes rates of return at different maturities in ascending order - has flattened dramatically since the third quarter of 1994. Read More
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Interest Rates
Interest rates continue to fall. Rates at all maturities have dropped roughly half a point since late June. Read More
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Derivatives
The volume of financial derivatives continues to grow at a rapid pace, although the growth has shifted somewhat from the over-the-counter (OTC) market to the organized exchanges. Read More
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Absolute Priority Rule Violations in Bankruptcy
Violations of the absolute priority rule in both private workouts and Chapter 11 reorganizations have been enigmatic for financial economists. Why do such violations exist? Do they promote or curtail economic efficiency? Read More
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Derivative Mechanics: The CMO
The current interest in financial derivatives sometimes appears to be driven by the same tastes that support police and doctor dramas on television: many crashes and a lot of blood. Read More
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Debt and Equity as Optimal Contracts
The model presented in this paper is a particular case of the principal-agent problem. Read More
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SAIF Policy Options
As part of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, Congress mandated a minimum coverage ratio of $1.25 of insurance reserves per $100 of insured deposits. Read More
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Imperfect State Verification and Financial Contracting
Standard work on costly state verification, monitoring, and auditing generally assumes perfect signals about the underlying state, especially in questions about financial contracting. Read More
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Executive Compensation: A Calibration Approach
We use a version of the Grossman and Hart (1983) principal-agent model with 10 actions and 10 states to produce quantitative predictions for executive compensation. Read More
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Underserved Mortgage Markets: Evidence from HMDA Data
A baseline evaluation of the variation in mortgage credit flows across different types of neighborhoods using HMDA data collected in 1990 and 1991. Read More
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Posted Rates as Signals in Mortgage Lending Markets
A discussion of how mortgage lenders might use posted lending terms to signal both their eagerness to take new loan applications and their lending standards. Read More
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How Important Are U.S. Capital Flows into Mexico?
In November 1993, the U.S. Congress voted to pass the North American Free Trade Agreement (NAFTA) after months of heated debate about its likely impact on our economy. Read More
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Fear and Loathing in Executive Pay
For some reason, people take offense when a corporate executive begins to make as much money as a basketball star or swimsuit model. Read More
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Specialization in Risk Management
The financial press is full of stories lately about the risks associated with financial derivatives. The casual reader might think that some new risks have been invented, or that our financial system is riskier now than it was a few years ago. Read More
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A Monte Carlo Examination of Bias Tests in Mortgage Lending
An exploration of the effectiveness of testing procedures in uncovering discrimination by mortgage lenders, reflecting perceived shortcomings in the scope of data provided by the Home Mortgage Disclosure Act. Read More
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Exclusion in All-Pay Auctions
In a recent paper, Baye, Kovenock, and de Vries (1993) derive a general formula for the seller's expected revenue in an all-pay auction, where the buyers' valuations are common knowledge. Read More
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The Evolving Loan Sales Market
Nearly everyone, from daily readers of the American Banker to devotees of It's a Wonderful Life or Bonnie and Clyde, somehow learns a few basic facts about banking. Read More
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Does Small Business Need a Financial Fix?
Although by most conventional economic standards the recent recession is two years past, the health of the economy remains a concern to policymakers. Read More
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Sharing With A Risk-Neutral Agent
In the standard solution to the principal-agent problem, a risk-neutral agent bears all the risk. This paper shows that, in fact, multiple solutions exist, and often the risk-neutral agent is not the sole bearer of risk. Read More
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Home Mortgage Lending by the Numbers
During the past year, several Federal Reserve reports on home mortgage lending have attracted widespread attention for what they revealed about racial lending patterns. Read More
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On Markovian Representations Of The Term Structure
The linkages between term structures separated by finite time periods can be complex. Read More
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Gilt by Association: Uncovering Expected Inflation
One unfortunate aspect of life in the United States today is that guesses about inflation really matter. We have to consider expected changes in the cost of living when negotiating our wages. Read More
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Intervention and the Bid-Ask Spread in G-3 Foreign Exchange Rates
Tests of the efficiency of foreign exchange markets continue to proliferate. Read More
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Securitization: More than Just a Regulatory Artifact
Competitive and regulatory pressures have prompted banks and other financial intermediaries to participate in credit markets in ways that are not directly reflected on their balance sheets. Read More
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Binomial Approximation in Financial Models: Computational Simplicity and Convergence
This paper explores the potential of transformation and other schemes in constructing a sequence of simple binomial processes that weakly converges to the desired diffusion limit. Read More
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Risk Aversion, Performance Pay, and the Principal-Agent Problem
This paper calculates numerical solutions to the principal-agent problem and compares the results to the stylized facts of CEO compensation. Read More
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Financial Efficiency and Aggregate Fluctuations: An Exploration
Changes in the efficiency of the financial system can greatly affect the overall economy. A simple real business cycle framework shows how banks can be a source, rather than just a filter, for output shocks. Read More
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Financial Fragility and Regional Economic Growth
Although the 1980s ushered in the second-longest economic expansion in U.S. history, regional economic performance was uneven during the decade. Read More
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Deregulation and the Location of Financial Institution Offices
Changes in the regulation and structure of the U.S. financial services industry over the last 15 years have led to allegations that the banking system has weakened its commitment to poor and minority consumers. Read More
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Do Excess Reserves Reveal Credit Crunches?
The anticipated economic recovery is haunted by the specter that banks, under pressure from regulators and shareholders, will make too few loans to reignite the economy. Read More
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Bracket Creep in the Age of Indexing: Have We Solved the Problem?
Indexation of the personal tax code for price-level changes represents one of the most significant elements of U.S. tax legislation in the 1980s. Read More
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A Regional Perspective on the Credit View
This paper develops a regional credit view to explain how regional credit-market performance can affect local economic activity. Read More
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Standardizing World Securities Clearance Systems
The dramatic increase in the volume of international securities trading has strained the present system of settling trades. Read More
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The High-Yield Debt Market: 1980-1990
Did the collapse of Drexel Burnham Lambert in February signal the end of the high-yield debt market? Read More
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Is There a Message in the Yield Curve?
Short-term bond yields have moved above long-term bond yields over the past year. Read More
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Regime Changes in Stock Returns
This paper discriminates between three potential sources of instability in parameter estimates of stock return models. Read More
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Portfolio Risks and Bank Asset Choice
This paper investigates the effects of both credit risk and interest-rate risk on bank portfolio choices. Read More
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The Costs of Default and International Lending
During the past few years, a number of less developed countries (LDCs) have had difficulty repaying their foreign debt. Read More
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Testing for Speculative Bubbles in Stock Prices
A modification of Kenneth West's method for investigating speculative bubbles in stock prices, in which a direct test of the "no bubble" hypothesis is applied to long-term annual U.S. stock-market data. Read More
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Financial Structure and the Adjustment of Capital Stock
An analysis of the corporate investment decision when financial structure has real effects, utilizing data for the U.S. manufacturing sector from 1954 to 1980. Read More
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Developing Country Lending and Current Banking Conditions
An examination of the evolutionary stages of the debt problem in developing countries, with a discussion of how U.S. banks and financial markets have adjusted to accommodate it and some proposed solutions to the problem. Read More
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Stock-Market Gyrations and Investment
The worldwide stock-market decline on October 19 has increased uncertainty about future changes in employment and output both in the United States and abroad. Read More
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The Japanese Edge in Investment: The Financial Side
The dramatic loss of U.S. international competitiveness in manufacturing industries has been of increasing concern to U.S. policymakers. Read More
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Concentration and Profitability in Non - MSA Banking Markets
An examination of the relationship between bank profitability and concentration using recent data from a sample of institutions drawn from non-metropolitan statistical area counties in Ohio and Pennsylvania. Read More
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Errors in Recorded Security Prices and the Turn-of-the-Year Effect
A study that concludes recorded security price errors are potential sources of misspecification in joint tests of the capital asset pricing model and market efficiency. Read More
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The Collapse in Gold Prices: A New Perspective
Using a gold-price model that depends heavily on government gold supplies, the author attempts to explain gold price movements since 1981. Read More
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Disinflation, Equity Valuation, and Investor Rationality
An examination of the relationship between inflation and equity prices, concluding that equity prices respond rationally to such factors as real interest rates and risk. Read More
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Equity, Efficiency, and Mispriced Deposit Guarantees
Federal deposit insurance is supposed to protect savers and to help stabilize our banking system. Read More
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Rival Stock Price Reactions to Large BHC Acquisition Announcements: Evidence of Linked Oligopoly
An examination of whether multimarket contacts among geographically diversified bank holding companies adversely affect competition. Read More
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Aggressive Uses of Chapter 11 of the Federal Bankruptcy Code
An examination of the aggressive uses of the corporate bankruptcy code from an economic and historical perspective, and some implications for economic competition in the United States. Read More
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The Default Premium and Corporate Bond Experience
A study that represents the first effort to tie together the differential returns required by holders of low-rated corporate bonds and the actual default experiences of these issues. Read More
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The Government Securities Market and Proposed Regulation
The failure of several unregulated government securities dealers since 1982 has led to pressure for at least minimum regulation of this market. Read More
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Junk Bonds and Public Policy
Over the past few years, the financial public has developed a fascination with the growth in the market for so-called junk bonds. Read More
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Major Trends in Capital Formation
Capital formation in the United States has undergone dramatic changes since the 1960s, particularly for domestic capital-goods producers. Read More
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Will Adjustable Rate Mortgages Survive?
The variety of mortgage loan programs currently available to home buyers has made choosing a mortgage loan as difficult as choosing a house. Read More
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Sources of Change in Rates of Return on Capital: 1952-82
This article reconsiders the problem of a declining rate of return on capital. The rate of return for non corporate businesses and corporations fell after 1965. Read More
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Safe-Harbor Leasing: Separating the Wheat from the Chaff
In August 1981 the U.S. Congress enacted the Economic Recovery Tax Act (ERT A) to stimulate investment in plants and equipment through expanded investment tax credits and a more rapid method of depreciation. Read More
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Stability in a Model of Staggered-Reserve Accounting
Critics of staggered-reserve accounting have used simple models to show that a disturbance to deposits with no change in total reserves sets in motion an undamped cycle. Read More
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Methods of Cash Management
Cash management-the control of payments, receipts, and any resulting transactions balances-has become increasingly sophisticated over the past decade. Read More
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Financial Services and Small Businesses
An important user of financial services is a group of customers known as small businesses. Read More
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Trends in Long-Term Commercial Bank Lending
Interest rates rose to unusually high levels in 1980, fluctuating widely and sharply throughout the year. Read More
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Interest - Rate Futures
The rapid growth of the interest-rate futures market has attracted widespread attention in the financial industry. Read More
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After Silver and Gold: Some Sober Thoughts on Speculative Bubbles
Recent months have witnessed a seeming madness in many of the world's financial markets. Following the crises in Iran and Afghanistan, investors appeared to be moving out of dollar assets and into precious metals. Read More
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The Surge in Gold Prices
Gold prices have more than quadrupled since July 1978, in contrast to the substantial stability they have exhibited for over a century. Read More