The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
Alejandro Justiniano, Giorgio E. Primiceri, and Andrea Tambalotti
There is no consensus among economists as to what drove the rise of U.S. house prices and household debt in the period leading up to the recent financial crisis. In this post, we argue that the fundamental factor behind that boom was an increase in the supply of mortgage credit, which was brought about by securitization and shadow banking, along with a surge in capital inflows from abroad. This argument is based on the interpretation of four macroeconomic developments between 2000 and 2006 provided by a general equilibrium model of housing and credit.
On Tuesday, April 14, the Federal Reserve Bank of New York hosted an all-day workshop entitled Chapter 9 and Alternatives for Distressed Municipalities and States. The workshop was jointly organized and sponsored by the Volcker Alliance and George Mason University’s State and Local Government Leadership Center. The event brought together key experts, practitioners, and researchers on the subject of fiscal distress at the state and local level. The aim of the session was to foster discussion on the role of Chapter 9 of the U.S. Bankruptcy Code, alternatives for distressed governments, and strategies to avoid stress and achieve good fiscal outcomes.
Andrew F. Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw
This morning, Jamie McAndrews, the Director of Research at the Federal Reserve Bank of New York, spoke to the press about the economic recovery, and his speech was followed by a special briefing by New York Fed economists on student loans. Here, we provide a short summary of the student loan briefing.
The April 2015 Empire State Manufacturing Survey, released today, points to continued weakness in New York’s manufacturing sector. The survey’s headline general business conditions index turned slightly negative for the first time since December, falling 8 points to -1.2 in a sign that the growth in manufacturing had paused. The new orders index—a bellwether of demand for manufactured goods—was also negative, pointing to a modest decline in orders for a second consecutive month. Employment growth slowed, too. The Empire Survey has been signaling sluggish growth since October of last year after fairly strong readings from May through September.
Mounting evidence says that “low-risk” investing delivers superior returns, comparable to strategies based on value, size, and momentum. Such tactics include the “risk parity” (RP) asset allocation approach, which received considerable attention during the 2013 taper tantrum when many RP funds reportedly deleveraged. This strategy requires long or overweight positions in low-risk asset classes, such as government bonds, and offsetting short or underweight positions in risky asset classes, including shares. The low-risk umbrella also covers “betting against beta” (BAB) within, rather than across, asset classes. For example, investing in shorter- as opposed to longer-duration bonds beats the bond market, or owning low-beta at the expense of high-beta shares outpaces the S&P 500. Whether RP or BAB, what matters is return per unit of risk, the bang for the buck. Put more formally, RP and BAB profitability rests on an inverse relation between Sharpe ratios (SRs) and beta, the covariance of asset returns with the market portfolio. Such findings contradict the intuition that higher returns compensate for risk. Instead, investors profit handsomely by levering up relatively safe assets and shorting comparatively risky securities. However, as my New York Fed staff report argues, alternative reasoning and samples, as well as the types and number of “risks,” raise questions about not only BAB with government bonds (BABgov) but perhaps also RP. The investment implications are obvious, but the arguments and underlying data patterns also hint at key policy issues.
For the first time in modern history, Puerto Rico is seeing its population decline. This troubling loss can be traced to an exodus of Puerto Rican citizens to the U.S. mainland, a current that has picked up considerably in recent years as Puerto Rico’s economy has deteriorated. Today, fully a third of those born in Puerto Rico now reside on the U.S. mainland. In this post, we examine the recent surge in out-migration that is driving Puerto Rico’s population decline (which we delve into in more detail in a recent article in the New York Fed’s Current Issues in Economics and Finance series), and then discuss measures the Island could adopt to address this troubling trend.
Centered in London, the banking panic of 1825 has been called the first modern financial crisis, the first Latin American crisis, and the first emerging market crisis. And while the panic displayed many of the key elements of past crises we have covered—fluctuations in money growth, an investment bubble, a stock market crash, and bank runs—this crisis had its own twists, including a Bank of England that hesitated before stepping in as lender of last resort. But it is perhaps best known for an infamous bond market swindle surrounding an entirely made-up Central American principality. In this edition of Crisis Chronicles, we explore the Panic of 1825 and visit the mythical nation of Poyais.
On April 1, 2014, the Federal Reserve began collecting transaction-level data on federal funds, Eurodollars, and certificates of deposits from a large set of domestic banks and agencies of foreign banks operating in the United States. Previously, the Fed had only received fed funds and Eurodollar data from major brokers, and not directly from the banks borrowing in these markets. These new data, collected on form FR 2420, have helped the Fed better understand activity in the fed funds and Eurodollar markets. In this post, we focus on the new data on fed funds, in light of the Federal Reserve Bank of New York’s Trading Desk announcement that it plans to use these data to calculate and publish the fed funds effective rate. We plan to publish other posts on the fed funds and Eurodollar markets over the next several months.
Tesla Motors’ shares saw a brief bounce from a far-out and fictional product (a smart watch) announced as part of an April fool's prank. While markets evidently made quick sense of the joke, that’s not always the case.
In March, the Federal Reserve and thirty-one large U.S. bank holding companies (BHCs) announced results of the latest Dodd-Frank Act-mandated stress tests. Some commentators have argued that BHCs, in designing their stress test models, have strong incentives to mimic the Fed’s stress test results, since the Fed’s results are an integral part of the Federal Reserve’s supervisory assessment of capital adequacy for these firms. In this post, we look at the 2015 stress test projections by the eighteen largest U.S. BHCs and by the Fed and compare them to similar numbers from 2013 and 2014. As stress testing becomes more established, do we see evidence that the BHCs are mimicking the Fed?
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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