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Marco Del Negro, Domenico Giannone, Marc Giannoni, Abhi Gupta, Pearl Li, and Andrea Tambalotti
Third of three posts
The preceding two posts in this series documented that interest rates on safe and liquid assets, such as U.S. Treasury securities, have declined significantly in the past twenty years. Of course, short-term interest rates in the United States are under the control of the Federal Reserve, at least in nominal terms. So it is legitimate to ask, To what extent is this decline driven by the Federal Reserve’s interest rate policy? This post addresses this question by coupling the results presented in the previous post with those obtained from an estimated dynamic stochastic general equilibrium (DSGE) model.
Brandyn Bok, Marco Del Negro, Domenico Giannone, Marc Giannoni, and Andrea Tambalotti
Second of three posts
The previous post in this series discussed several possible explanations for the trend decline in U.S. real interest rates since the late 1990s. We noted that while interest rates have generally come down over the past two decades, this decline has been more pronounced for Treasury securities. The conclusion that we draw from this evidence is that the convenience associated with the safety and liquidity embedded in Treasuries is an important driver of the secular (long-term) decline in Treasury yields. In this post and the next, we provide an overview of the two complementary empirical strategies we adopt to extract the trends in real interest rates and quantify their driving factors. Much more detail on all of this can be found in our recently published Brookings paper.
Marco Del Negro, Domenico Giannone, Marc Giannoni, and Andrea Tambalotti
First of three posts
Interest rates in the United States have remained at historically low levels for many years. This series of posts explores the forces behind the persistence of low rates. We briefly discuss some of the explanations advanced in the academic literature, and propose an alternative hypothesis that centers on the premium associated with safe and liquid assets. Our argument, outlined in a paper we presented at the Brookings Conference on Economic Activity last March, suggests that the increase in this premium since the late 1990s has been a key driver of the decline in the real return on U.S. Treasury securities.
Over the last decade, the concept of “safe assets” has received increasing attention, from regulators and private market participants, as well as researchers. This attention has led to the uncovering of some important details and nuances of what makes an asset “safe” and why it matters. In this blog post, we provide a review of the different aspects of safe assets, discuss possible reasons why they may be beneficial for investors, and give concrete examples of what these assets are in practice.
Stefan Avdjiev, Leonardo Gambacorta, Linda S. Goldberg, and Stefano Schiaffi
International capital flows channel large volumes of funds across borders to both public and private sector borrowers. As they are critically important for economic growth and financial stability, understanding their main drivers is crucial for both policymakers and researchers. In this post, we explore the evolving impact of changes in U.S. monetary policy on global liquidity.
Viral V. Acharya, Michael J. Fleming, Warren B. Hrung, and Asani Sarkar
During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions—the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more. Our findings reinforce the importance of Bagehot’s principle that the lender-of-last resort should lend only against high-quality collateral and at a penalty rate so as to discourage unneeded or opportunistic borrowing.
Oil prices plunged 65 percent between July 2014 and December of the following year. During this period, the yield spread—the yield of a corporate bond minus the yield of a Treasury bond of the same maturity—of energy companies shot up, indicating increased credit risk. Surprisingly, the yield spread of non‑energy firms also rose even though many non‑energy firms might be expected to benefit from lower energy‑related costs. In this blog post, we examine this counterintuitive result. We find evidence of a liquidity spillover, whereby the bonds of more liquid non‑energy firms had to be sold to satisfy investors who withdrew from bond funds in response to falling energy prices.
How does monetary policy affect spending in the economy? The economic literature suggests two main channels of monetary transmission: the money or interest rate channel and the bank lending channel. The first view focuses on changes in real interest rates resulting from a shift in monetary policy and corresponding responses in consumption, saving, and investment. The second view focuses on changes in the supply of bank credit resulting from an altered policy stance and concomitant changes in spending.
Nicola Cetorelli, Fernando Duarte, Thomas Eisenbach, and Emily Eisner
On December 9, 2015, Third Avenue Focused Credit Fund (FCF) announced a “Plan of Liquidation,” effectively halting investor redemptions. This announcement followed a period of poor performance and large outflows. Assets at the fund had declined from a peak of $2.5 billion in May of 2015 to $942 million in November. Investors had redeemed more than $1.1 billion in shares since April 2015, and the fund’s year-to-date performance as of November had fallen below -21 percent. The FCF “run” highlights the need to quantify the potential for systemic risk among open-end mutual funds and the potential for contagion in the event of more widespread runs on other vulnerable funds. In this post, we first characterize open-end mutual funds that seem vulnerable to redemptions in much the same way as FCF. We then analyze the potential for fire-sale spillovers to other mutual funds if large redemptions in “at-risk” funds were to occur.
The interdealer market for Treasury securities shares many features with other highly liquid markets that trade electronically using anonymous central limit order books. The interdealer Treasury market, however, contains a unique trading protocol, the so-called workup, that accounts for the majority of interdealer trading volume. While the workup is designed to enhance liquidity in a market with diverse participation, it may also delay certain price-improving order book adjustments and therefore affect price discovery. In this post, we exploit the tight relationship between the ten-year Treasury note traded on the BrokerTec platform and the corresponding Treasury futures contract to explore how the workup protocol affects trading in the interdealer market and to highlight the impact of technological changes on observed trading behaviors.
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.
The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.
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