Liberty Street Economics

October 17, 2023

How Has Treasury Market Liquidity Evolved in 2023?

Michael Fleming

Decorative photo: close up of the words "The Treasury" on the treasury building showing the top of the columns outside the structure.

In a 2022 post, we showed how liquidity conditions in the U.S. Treasury securities market had worsened as supply disruptions, high inflation, and geopolitical conflict increased uncertainty about the expected path of interest rates. In this post, we revisit some commonly used metrics to assess how market liquidity has evolved since. We find that liquidity worsened abruptly in March 2023 after the failures of Silicon Valley Bank and Signature Bank, but then quickly improved to levels close to those of the preceding year. As in 2022, liquidity in 2023 continues to closely track the level that would be expected by the path of interest rate volatility.

Posted at 7:00 am in Financial Markets, Treasury | Permalink

October 16, 2023

Racial Discrimination in Child Protective Services

Natalia Emanuel, E. Jason Baron, Joseph J. Doyle Jr., and Peter Hull

Illustration: dark purple background with illustration of two hands holding up two children of different races. Disparities: Is race a factor in foster care placement?

Childhood experiences have an enormous impact on children’s long-term societal contributions. Experiencing childhood maltreatment is associated with compromised physical and mental health, decreased educational attainment and future earnings, and increased criminal activity. Child protective services is the government’s way of endeavoring to protect children. Foster care consequently has large potential effects on a child’s future education, earnings, and criminal activity. In this post, we draw on a recent study to document disparities in the likelihood that children of different races will be placed into foster care.

Posted at 7:00 am in Human Capital, Inequality | Permalink

October 12, 2023

Do Large Firms Generate Positive Productivity Spillovers?

Mary Amiti, Cédric Duprez, Jozef Konings, and John Van Reenen

Photo: large corporate buildings photographed from the ground to the sky.

Numerous studies have documented the rising dominance of large firms over the last few decades in many industrialized countries. Many research papers have focused on the potential negative effects of this increased market concentration, raising concerns about market power in both labor and product markets. In a new study, we investigate whether large firms also generate positive effects. Our research shows that large firms generate significant positive total factor productivity (TFP) spillovers to their domestic suppliers. To date, these types of spillovers have only been identified for multinational enterprises located in developing countries. Using firm-to-firm transaction data for an industrialized country, Belgium, we find that large domestic firms, as well as multinationals, generate positive TFP spillovers.

Posted at 7:00 am in Macroeconomics | Permalink

October 11, 2023

Spending Down Pandemic Savings Is an “Only‑in‑the‑U.S.” Phenomenon

Thomas Klitgaard and Matthew Higgins

Customers leave store with their purchased items. (Photo by Joshua Lott/Getty Images)

Household saving soared in the United States and other high-income economies during the pandemic, as consumers cut back on spending while government policies supported incomes. More recently, saving behavior has diverged, with the U.S. saving rate dropping below its pre-pandemic average while saving rates elsewhere have remained above their pre-pandemic averages. As a result, U.S. consumers have been spending down the “excess savings” built up during the pandemic while the excess savings abroad remain untapped. This divergent behavior helps explain why U.S. GDP has returned to its pre-pandemic trend path even as GDP levels in other high-income economies continue to run well below trend.

Posted at 7:00 am in International Economics, Macroeconomics | Permalink

October 10, 2023

Who’s Borrowing and Lending in the Fed Funds Market Today?

Gara Afonso, Gonzalo Cisternas, Brian Gowen, Jason Miu, and Joshua Younger

Federal reserve building Washington DC lit up at twilight.

The Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, which is the rate set in the market for uncollateralized short-term lending and borrowing of central bank reserves in the U.S. Since the global financial crisis, the market for federal funds has changed markedly. In this post, we take a closer look at who is currently trading in the federal funds market, as well as the reasons for their participation.

Posted at 7:00 am | Permalink

October 5, 2023

Does Income Inequality Affect Small Firms?

Donggyu Lee, Thomas Drechsel, and Sebastian Doerr

Illustration of Income Inequality: Is job creation impacted? Image has a large building with several people outside, next to a drawing of a small business with one person outside. Dark green background color.

The share of income going to high-income households has increased significantly in the United States in recent decades. In 1980, the average income share of earners in the top 10 percent was around 30 percent. However, by 2015, it had surpassed 45 percent. The employment share of small firms has also declined, with a decrease of approximately 5 percentage points over the same period. In this post, we use variation across states to show a correlation between these two developments, with states having the greatest increase in the upper income share also tending to be those with the biggest job creation declines in small firms compared to large firms. One explanation for this correlation is that the increase in the income share of the highest income earners reduced deposits in small and medium-size banks from what they otherwise would have been. In doing so, this shift in income reduced the available credit for small firms, putting them at a disadvantage relative to large firms.

Posted at 7:00 am in Financial Intermediation, Inequality | Permalink

October 3, 2023

A Look at Convenience Yields around the World

William Diamond and Peter Van Tassel

Decorative image: Magnifying glass over a percent sign on flattened world map background.

This post estimates “convenience yields” for government debt in ten of the G11 currencies based on analysis from a recent paper. As in our companion post, we measure convenience yields with option-implied box rate data that is estimated from options traded on the main stock market index in each country. We find that a country’s average convenience yield is closely related to its level of interest rates. In addition, we find that average covered interest parity (CIP) deviations are roughly the same across countries when they are measured with box rates. We rationalize these findings with a model in which convenience yields depend on domestic financial intermediaries, but CIP deviations depend on international arbitrageurs funded with dollar debt.

Posted at 7:00 am in Financial Markets, Treasury | Permalink

October 2, 2023

Options for Calculating Risk‑Free Rates

Jules van Binsbergen, William Diamond, and Peter Van Tassel

Decorative image: Magnifying glass over a percent sign on green background.

One of the most fundamental concepts in finance is the notion of a risk-free rate. This interest rate tells us how much money investors are guaranteed to receive in the future by saving one dollar today. As a result, risk-free rates reflect investors’ preferences for payoffs in the future relative to the present. Yields on U.S. Treasury securities are generally viewed as a standard benchmark for the risk-free rate, but they may also feature a “convenience yield,” reflecting Treasuries’ special, money-like properties. In this post, we estimate a risk-free rate implicit in the prices of S&P 500 index options—called the box rate—to measure investors’ time preference separate from Treasury convenience yields.

Posted at 7:00 am in Financial Markets, Treasury | Permalink | Comments (1)

September 27, 2023

Why Are China’s Households in the Doldrums?

Jeff Dawson

Chinese people shopping on the crowded streets of HongKong

A perennial challenge with China’s growth model has been overly high investment spending relative to GDP and unusually low consumer spending, something which China has long struggled to rebalance. As China attempts to move away from credit-intensive, investment-focused growth, the economy’s growth will have to rely on higher consumer spending. However, a prolonged household borrowing binge, COVID scarring and a deep slump in the property market in China have damaged household balance sheets and eroded consumer sentiment. In this post, we examine the impact of recent shocks on Chinese household behavior for clues around the outlook for reviving consumption and economic growth in China.

Posted at 7:00 am in Household Finance, International Economics | Permalink

September 26, 2023

Who Uses “Buy Now, Pay Later”?

Felix Aidala, Daniel Mangrum, and Wilbert van der Klaauw

Illustration of a person hunched over carrying a bag of money close to stepping into a hole with a clock on the background of the illustration. Dark blue background with light blue lettering indicating: Credit Access. Who's at Risk?

“Buy now, pay later” (BNPL) has become an increasingly popular form of payment among Americans in recent years. While BNPL provides shoppers with the flexibility to pay for goods and services over time, usually with zero interest, the Consumer Financial Protection Bureau (CFPB) has identified several areas of potential consumer harm associated with its growing use, including inconsistent consumer protections, and the risk of excessive debt accumulation and over-extension. BNPL proponents have argued that the service enables improved credit access and greater financial inclusion, with approval being quick and relatively easy. More research is needed to assess the overall risks and benefits of BNPL for consumers. As a first step, we draw on new survey data to examine the background and circumstances of consumers who receive and take up BNPL offers. We find both the availability and use of BNPL to be fairly widespread but see disproportionate take-up among consumers with unmet credit needs, limited credit access, and greater financial fragility. While BNPL expands financial inclusion, especially to those with low credit scores, there is a risk that these payment plans contribute to excessive debt accumulation and over-extension.

Posted at 10:00 am in Household Finance | Permalink

Markets & Policy Implementation

Liberty Street Economics

How Has Treasury Market Liquidity Evolved in 2023?

Racial Discrimination in Child Protective Services

Do Large Firms Generate Positive Productivity Spillovers?

Spending Down Pandemic Savings Is an “Only‑in‑the‑U.S.” Phenomenon

Who’s Borrowing and Lending in the Fed Funds Market Today?

Does Income Inequality Affect Small Firms?

A Look at Convenience Yields around the World

Options for Calculating Risk‑Free Rates

Why Are China’s Households in the Doldrums?

Who Uses “Buy Now, Pay Later”?

Economic Inequality

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