Liberty Street Economics

May 8, 2026

Stress and Strain from NBFIs to Banks

Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman

Do the recent stresses in the NBFI space—notably the bankruptcies of Tricolor and First Brands, and the decision of Blue Owl Capital Corp II (OBDC II) to end its redemption program and return capital through a wind-down of the fund—create distress for banks? The general sentiment is that the recent stresses are unlikely to amount to systemic concerns, although it does not mean there might not be “some stress and strain” for banks and that policymakers are “watching carefully” for exposure across banks. In a series of previous posts, we showed that shocks to nonbank financial institutions (NBFIs) directly impact banks that have exposures to NBFIs. In this post, we show that bank stocks have been directly impacted by NBFIs yet again. In short, NBFI troubles do result in “stress and strain” for banks.

Posted at 7:00 am in Banks, Nonbank (NBFI) | Permalink | Comments (0)

May 6, 2026

Same Shock, Different Roads? A K‑Shaped Pattern at the Pump

Rajashri Chakrabarti, Thu Pham, Beck Pierce, and Maxim Pinkovskiy

AI generated: Hand Of A Woman Pumping Gas Into A Vehicle

In March 2026, energy prices surged to a four-year high, driven by the Iranian closure of the Strait of Hormuz amid the ongoing conflict in the Middle East. In this Liberty Street Economics post, we use the new consumer spending module of the Economic Heterogeneity Indicators to analyze recent changes in nominal and real gas consumption across different income groups. We find that households had very different experiences with gasoline spending: in March, high-income households increased nominal spending the most and kept real consumption essentially unchanged, while low-income households decreased real consumption of gasoline but still saw sharply increased nominal spending because of the rise in gas prices. Therefore, with the sharp increases in gasoline prices in March, a K-shaped pattern in gasoline consumption emerged—showing faster consumption growth for high-income households relative to low-income households. These gasoline consumption patterns qualitatively match those following the increase in energy prices at the beginning of the Russia-Ukraine war in spring 2022, even though the gap in consumption trends during the current episode is quantitatively larger.

Posted at 11:30 am in Household Finance, K-Shaped Economy | Permalink | Comments (0)

May 4, 2026

In What Ways Has U.S. Trade with China Changed?

Hunter L. Clark and Gregory Simitian

Illustration depicting a line from China to Vietnam and from Vietnam to the U.S.

Over the past year, U.S. trade policy with China has undergone enormous changes, but with surprisingly little effect on overall trade balances. In fact, the U.S.’s twelve-month trade deficit, while highly volatile due to import front-running early in the year, ended 2025 at $1.2 trillion, almost unchanged from 2024. At the same time, China’s trade surplus with the world actually increased from $1 trillion to $1.2 trillion. However, when looking at changes between individual countries, one sees large shifts in bilateral balances. In this post, we will focus on changing trade flows between the U.S., China, and southeast Asia.

Posted at 7:00 am in International Economics, Tariffs | Permalink | Comments (0)

May 1, 2026

Explaining the K‑Shaped Economy: What’s Behind the Divide?

Rajashri Chakrabarti, Thu Pham, Beck Pierce, and Maxim L. Pinkovskiy

split photo of two different women: one is carrying shopping bags in a high end retail store. The other is looking over a receipt from a grocery shopping as she carries the shopping cart.

In our companion post, we used a new module of our Economic Heterogeneity Indicators (EHIs) to shed light on how recent retail spending growth has been driven by high-income households. This fact is consistent with the popular press’s idea of a “K-shaped economy” in which higher-income households experience faster growth in spending than lower-income households. In this post, we dive deeper into the reasons behind this divergence by analyzing for which goods this trend holds true and ask whether it can be explained by changes in wages, inflation, or wealth. We find that, since 2023, wealth has increased the most for high-income households, while inflation has risen the most for low-income households, with both factors helping explain the fact that real retail spending rose the most for high-income households. In contrast, earnings display a more mixed pattern, though earnings of the highest earners have grown more rapidly than earnings of the lowest earners.

Posted at 10:01 am in Household Finance, Inequality, K-Shaped Economy, Microeconomics | Permalink | Comments (0)

Tracking the K‑Shaped Economy: Who’s Driving Spending?

Rajashri Chakrabarti, Thu Pham, Beck Pierce, and Maxim L. Pinkovskiy

Shopping Spree in Modern Retail Environment

Aggregate real consumer spending has risen solidly since 2023. However, it is less clear how widely shared this improvement has been across all segments of society. This is important because systematic heterogeneity may mask the dependence of aggregate growth on a relatively small group of households and thus conceal macroeconomic risks. In this post, we use consumer spending data recently added to the Economic Heterogeneity Indicators (EHIs) and find that retail spending growth has been driven by high-income households—those earning more than $125,000 per year. In the popular press, the phenomenon of higher-income households growing at a faster rate than lower-income households has been referred to as the K-shaped economy. We find that consumption has exhibited a K-shaped economy since 2023, although not in the pre-COVID period or during the post-COVID recovery.

Posted at 10:00 am in Household Finance, Inequality, K-Shaped Economy, Microeconomics | Permalink | Comments (1)

April 16, 2026

Bank Failures: The Roles of Solvency and Liquidity

Sergio Correia, Stephan Luck, and Emil Verner

Photo of a long line of customers waiting to get into a Bank, open for the first time since the federal government takeover due to the bank's subprime mortgages with people with bad or no credit history.

Do banks fail because of runs or because they become insolvent? Answering this question is central to understanding financial crises and designing effective financial stability policies. Long-run historical evidence reveals that the root cause of bank failures is usually insolvency. The importance of bank runs is somewhat overstated. Runs matter, but in most cases they trigger or accelerate failure at already weak banks, rather than cause otherwise sound banks to fail.

Posted at 10:00 am in Bank Capital, Banks, Liquidity, Panic | Permalink | Comments (0)

April 15, 2026

The R*–Labor Share Nexus

Sophia Cho and John C. Williams

Road construction with view of two human workers beyond road mac

Over the past quarter century, the U.S. economy has experienced significant declines in both the labor share of income and the natural rate of interest, referred to as R*. Existing research has largely analyzed these two developments in isolation. In this post, we provide a simple model that captures the joint evolution of the labor share and R*, which we call the R*–labor share nexus. Our key finding is that structural changes affecting R* also influence the evolution of the labor share, and thereby wages and prices. This highlights a potentially important channel, absent from many macroeconomic models, through which the factors that determine R* also affect the labor share and, in turn, broader macroeconomic developments, with implications for monetary policy.

Posted at 7:00 am in Macroeconomics | Permalink | Comments (0)

April 14, 2026

Use of Gen AI in the Workplace and the Value of Access to Training

Ali Hashim, Gizem Kosar, and Wilbert van der Klaauw

Image of workers in business suits being trained in AI through whiteboard and computer screen

The rapid spread of generative AI (AI) tools is reshaping the workplace at a remarkable rate. Yet relatively little is known about whether workers have access to these tools, how the tools affect workers’ daily productivity, and how much workers value the training needed to use the tools effectively. In this post, we shed light on these issues by drawing on supplemental questions in the November 2025 Survey of Consumer Expectations (SCE), fielded to a representative sample of the U.S. population. We find that adoption of AI tools at work is heterogeneous, that a sizable share of workers see AI training as important, and that a significant share of employers are nonetheless not yet providing access to AI tools or training on how to use them.

Posted at 10:30 am in Expectations, Human Capital, Labor Market | Permalink | Comments (0)

April 13, 2026

What Millions of Homeowner’s Insurance Contracts Reveal About Risk Sharing

Hyeyoon Jung and Jaehoon (Kyle) Jung

Hurricane Debby tropical rainstorm flooded residential homes and cars in suburban community in Sarasota, Florida. Aftermath of natural disaster.

Housing is the largest component of assets held by households in the United States, totaling $48 trillion in 2025. When natural disasters strike, the resulting damage to homes can be large relative to households’ liquid savings. Homeowner’s insurance is the primary financial tool households use to protect themselves against property risk. Despite the economic importance of homeowner’s insurance, we know surprisingly little about how insurance contracts are actually designed with respect to property risk. In this post, which is based on our new paper, “Economics of Property Insurance,” we examine how homeowner’s insurance contracts are structured in practice. Using a new granular dataset covering millions of homeowner’s insurance policies, we document four striking patterns about coverage limits, deductibles, insurance pricing, and the distribution of property losses.

Posted at 7:00 am in Household Finance | Permalink | Comments (0)

April 9, 2026

A Closer Look at Emerging Market Resilience During Recent Shocks

Hunter L. Clark, Jeffrey B. Dawson, and Julian Gonzalez-Murphy

Ai generated decorative image of flags of emerging markets done in the style of watercolor.

A succession of shocks to the global economy in recent years has focused attention on the improved economic and financial resilience of emerging market economies. For some of these economies, this assessment is well-founded and highlights the fruits of deep, structural economic reforms since the 1990s. However, for a much larger universe of countries, the ability to weather shocks is still mixed and many remain vulnerable. In this post, we explore the divide between the two sets of countries and focus on the effects of recent economic shocks, including the ongoing conflict in the Middle East.

Posted at 7:00 am in International Economics | Permalink

Markets & Policy Implementation

Liberty Street Economics

Stress and Strain from NBFIs to Banks

Same Shock, Different Roads? A K‑Shaped Pattern at the Pump

In What Ways Has U.S. Trade with China Changed?

Explaining the K‑Shaped Economy: What’s Behind the Divide?

Tracking the K‑Shaped Economy: Who’s Driving Spending?

Bank Failures: The Roles of Solvency and Liquidity

Use of Gen AI in the Workplace and the Value of Access to Training

What Millions of Homeowner’s Insurance Contracts Reveal About Risk Sharing

A Closer Look at Emerging Market Resilience During Recent Shocks

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