Natural Experiment Sheds Light on the Market Effects of Herding

Sushant Acharya and Alvaro Pedraza



Pension funds are expected to behave in a patient, countercyclical manner, making the most of low valuations over the business cycle to achieve high returns. Such behavior provides liquidity and stability to the financial system. However, this belief has come under question. A large theoretical literature has emerged which looks at how short-term considerations affecting these institutional investors might arise from relative performance concerns or from the influence of other incentives introduced by market and regulatory monitoring. Such considerations might incentivize fund managers to mimic others and herd toward common assets. Given the sizable wealth under management by these investors, such herding behavior can potentially have large effects on asset prices both in the short and long run.

Same Name, New Businesses: Evolution in the Bank Holding Company

Nicola Cetorelli and Samuel Stern

Correction: We revised the left panel of the chart “BHC Subsidiary Composition” on March 16, 2016, to update the number of “Nonfinancial” firms. This figure was understated in the original version of the chart. We regret the error.



When we think of banks, we typically have in mind our local bank branch that stores deposits and issues mortgages or business loans. Prima facie there is nothing wrong with this image. After all, there are still almost 6,000 unique commercial banks in the United States that specialize in deposit-taking and loan-making; when we include thrifts and credit unions, this number more than doubles. What we typically forget, however, is that most commercial banks are subsidiaries of larger bank holding companies (BHCs), and in fact nearly all commercial bank assets fall under such BHCs. This post presents a first in-depth analysis of the evolving organizational structure of U.S. bank holding companies over the last twenty-five years. We present a unique new database that details BHC structure at a level previously unavailable in any systematic way.

How Much Do Inflation Expectations Matter for Inflation Dynamics?

Argia Sbordone and Sara Shahanaghi

Inflation dynamics are often described by some form of the Phillips curve. Named after A. W. Phillips, the British economist whose study of U.K. wage and unemployment data laid the groundwork, the Phillips curve denotes an inverse relationship between inflation and some measure of economic slack. A much-discussed issue in the literature is how forward-looking this relationship is. In this post, we address this question using a flexible version of the New Keynesian Phillips curve (NKPC) to illustrate the key role that expectations play in inflation dynamics.

Do Better Bank Services Have a Hidden Cost?

Dong Beom Choi and Ulysses Velasquez



You walk into a bank branch, check in hand. You find yourself in a well-lit space with modern furnishings, and you help yourself to a cup of freshly brewed coffee, courtesy of the bank. Neatly dressed assistants in uniform stand in a row, ready to attend to customers at a moment’s notice, and in fact, one of them approaches you to help you deposit your check. Having finished your business, you leave feeling reassured that such a customer-oriented organization is diligently tending to your hard-earned money. But what could possibly be missing?

Are BHCs Mimicking the Fed’s Stress Test Results?

Angela Deng, Beverly Hirtle, and Anna Kovner



In March, the Federal Reserve and thirty-one large bank holding companies (BHCs) disclosed their annual Dodd-Frank Act stress test (DFAST) results. This is the third year in which both the BHCs and the Fed have published their projections. In a previous post, we looked at whether the Fed’s and the BHCs’ stress test results are converging in the aggregate and found mixed results. In this post, we look at stress test projections made by individual BHCs. If the Fed’s projections are very different from a BHC’s in one year, do the BHC projections change in the following year to close this gap? Or are year-to-year changes in BHC stress test projections driven more by changes in underlying risk factors? Evidence of BHCs mimicking the Fed would be problematic if it meant that the BHCs are not really independently modelling their own risks. Convergence poses a potential risk to the financial system, since a financial system with monoculture in risk measurement models could be less stable than one in which firms use diverse models that collectively might be more likely to identify emerging risks.

From the Vault: Understanding Puerto Rico’s Economic Challenges

Anna Snider



Recent news examining the toll that a decade of stagnation, out-migration, and heavy debt has taken on Puerto Rico draws on work summarized in two Liberty Street Economics posts. For example, the New York Times cited our analysis of the U.S. Commonwealth’s ongoing population decline. In an April post, economists Jaison Abel and Richard Deitz put numbers on the exodus, reporting that over the last ten years, Puerto Rico’s population has dwindled to 3.6 million, a decline of more than 5 percent, which they attribute in part to falling birthrates but mostly to migration to the U.S. mainland.

Searching for Higher Wages

Luis Armona, Samuel Kapon, Laura Pilossoph, Ayşegül Şahin, and Giorgio Topa



Since the peak of the recession, the unemployment rate has fallen by almost 5 percentage points, and observers continue to focus on whether and when this decline will lead to robust wage growth. Typically, in the wake of such a decline, real wages grow since there is more competition for workers among potential employers. While this relationship has historically been quite informative, real wage growth more recently has not been commensurate with observed declines in the unemployment rate.

A Distributed Version of Repugnance as a Constraint on Markets

Rod Garratt

The 2012 Nobel Prize in economics was awarded to Alvin E. Roth and Lloyd S. Shapley for their work on matching problems. Two-sided matching problems, like assigning jobs to workers or dorm rooms to students, can be complicated enough. But sometimes the matching problem can be even more difficult. It may be that an item supplied by Alice is useful to Bob, but Bob has nothing of value to give to Alice. If, however, the item supplied by Bob is valuable to Charlie, then there is the potential for a matching chain. Charlie gives something to Alice, Alice gives something to Bob, and Bob gives something to Charlie. Such chains can by themselves be very complicated, and work must be done to identify chains that provide the most benefit. The first Nobel laureate mentioned above has done considerable work designing matching mechanisms used in kidney exchange. But why is all of this necessary? Why isn’t there simply a market with prices?