Liberty Street Economics

Look for our next post on November 3.

September 30, 2025

Reading the Panic: How Investors Perceived Bank Risk During the 2023 Bank Run

Natalia Fischl-Lanzoni, Martin Hiti, and Asani Sarkar

People queuing in front of the bank door - AI Generated

The bank run that started in March 2023 in the U.S. occurred at an unusually rapid pace, suggesting that depositors were surprised by these events. Given that public data revealed bank vulnerabilities as early as 2022:Q1, were other market participants also surprised? In this post, based on a recent paper, we develop a new, high-frequency measure of bank balance sheet risk to examine how stock market investors’ risk sensitivity evolved around the run. We find that stock market investors only became attentive to bank risk after the run and only to the risk of a limited number (less than one-third) of publicly traded banks. Surprisingly, investors seem to have mostly focused on media exposure and not fundamentals when evaluating bank risk. In a companion post, we examine how the Federal Reserve’s liquidity support affected investor risk perceptions.

Posted at 7:00 am in Banks | Permalink | Comments (3)

September 24, 2025

The Financial Stability Implications of Tokenized Investment Funds

Pablo Azar, Francesca Carapella, JP Perez-Sangimino, Nathan Swem, and Alexandros P. Vardoulakis

Abstract visuals of blockchain technology in business, featuring

In a previous post, we provided background information about the emergence of tokenized investment funds and their use cases. These use cases are currently limited to the digital asset ecosystem. However, the recent approval of cryptocurrency exchange-traded funds (ETFs) and the passage of the GENIUS Act raise concerns about the impact of these tokenized investment fund to the broader financial system. In this post, we assess this impact by considering three economic mechanisms based in part on market participants’ investment strategies and liquidity needs. They include: liquidity transformation, interconnections between the digital asset and the traditional financial system, and transaction settlement. Through these mechanisms, tokenization of investment funds can bring about financial stability benefits in the form of reduced redemption pressures and additional sources of liquidity for fund issuances, but may also increase interconnectedness between the traditional financial system and digital asset ecosystem, thereby amplifying existing financial stability risks.

Posted at 7:01 am in Cryptocurrencies, Systemic Risk | Permalink | Comments (2)

The Emergence of Tokenized Investment Funds and Their Use Cases

Alexandros P. Vardoulakis, Francesca Carapella, JP Perez-Sangimino, Nathan Swem, and Pablo Azar

A blockchain is a distributed database where independent computers across the world maintain identical copies of a transaction record, updating it only when the network reaches consensus on new transactions—making the history transparent and extraordinarily difficult to alter. Historically, bonds have traded almost entirely in over-the-counter (OTC) markets, while equities and money market fund shares have largely settled through centralized infrastructures such as stock exchanges and central securities depositories. In both settings, each institution maintains its own records, and post-trade steps like confirmation, clearing, and settlement require multiple intermediaries and repeated reconciliation.

Posted at 7:00 am in Cryptocurrencies, Systemic Risk | Permalink | Comments (0)

September 22, 2025

Financial Intermediaries and Pressures on International Capital Flows

Linda S. Goldberg and Samantha Hirschhorn

Money transfer. Global Currency. Stock Exchange. Stock vector illustration.

Global factors, like monetary policy rates from advanced economies and risk conditions, drive fluctuations in volumes of international capital flows and put pressure on exchange rates. The components of international capital flows that are described as global liquidity—consisting of cross-border bank lending and financing of issuance of international debt securities—have sensitivities to risk conditions that have evolved considerably over time. This risk sensitivity has been driven, in part, by the composition and business models of the financial institutions involved in funding. In this post, we ask whether these same features have led to changes in the pressures on currency values as risk conditions evolve. Using the Goldberg and Krogstrup (2023) Exchange Market Pressure (EMP) country indices, we show that the features of financial institutions in the source countries for international capital do influence how destination countries experience currency pressures when risk conditions change. Better shock-absorbing capacity in financial institutions moderates the pressures toward depreciation of currencies during adverse global risk events.

Posted at 7:00 am in Bank Capital, Exchange Rates, Financial Institutions, International Economics, Systemic Risk | Permalink | Comments (0)

September 19, 2025

The New York Fed DSGE Model Forecast—September 2025

Donggyu Lee, Elena Elbarmi, Ibrahima Diagne, Keshav Dogra, Marco Del Negro, and Michael Pham

decorative photo of line and bar chart over data

This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since June 2025. To summarize, the model expects growth in 2025 to be stronger, and inflation lower, than in June. Moreover, the model’s predictions for the short-run real natural rate of interest (r*) have increased relative to June throughout the forecast horizon, partly reflecting the strength in the economy and the buoyant financial conditions.

Posted at 9:00 am in DSGE | Permalink | Comments (0)

September 4, 2025

Are Businesses Scaling Back Hiring Due to AI?

Jaison R. Abel, Richard Deitz, Natalia Emanuel, Ben Hyman, and Nick Montalbano

Generative AI virtual assistant tools for prompt engineer and user for ease of engage artificial intelligence AI technology help people to work with generative AI functions by prompting the AI snugly

The swift advancement of artificial intelligence (AI) has sparked significant concern that this new technology will replace jobs and stifle hiring. To explore the effects of AI on employment, our August regional business surveys asked firms about their adoption of AI and if they had made any corresponding adjustments to their workforces. Businesses reported a notable increase in AI use over the past year, yet very few firms reported AI-induced layoffs. Indeed, for those already employed, our results indicate AI is more likely to result in retraining than job loss, similar to our findings from last year. That said, AI is influencing recruiting, with some firms scaling back hiring due to AI and some firms adding workers proficient in its use. Looking ahead, however, layoffs and reductions in hiring plans due to AI use are expected to increase, especially for workers with a college degree.

Posted at 10:00 am in Labor Market, New Jersey, New York, Regional Analysis | Permalink

September 3, 2025

Economic Capital: A New Measure of Bank Solvency

Beverly Hirtle and Matthew Plosser

Financial stability: A classic bank building with columns, financial symbols, and charts, showcasing the reliability and trustworthiness of a bank

Bank supervisors, industry analysts, and academic researchers rely on a range of metrics to track the health of both individual banks and the banking system as a whole. Many of these metrics focus on bank solvency—the likelihood that a bank will be able to repay its obligations and thus retain its funding and continue to supply services to consumers, businesses, and other financial institutions. We draw on our recent research to describe a new solvency metric that is more forward-looking, more timely, and more comprehensive in its assessment of solvency than many current measures.

Posted at 7:00 am in Bank Capital | Permalink

September 2, 2025

What Is Natural Disaster Clustering—and Why Does It Matter for the Economy?

Jacob Kim-Sherman and Lee Seltzer

Photo of Large Fire Overtaking California Homes

Understanding the economic and financial consequences of natural disasters is a major concern for researchers and policymakers. The way in which overlapping natural disaster systems interact, as exemplified by the recent fires in Los Angeles being exacerbated by strong winds, is a major area of study in environmental science but has received comparatively little attention in the economics literature. Examining these potential interactions would likely be important for financial institutions, since such assessments would, in many instances, increase the estimated financial impact of a given natural disaster. In our recent Staff Report, we develop a method of identifying disaster systems in natural disaster data, such as the Spatial Hazard Events and Loss Database (SHELDUS), and use it to argue that the economics and finance literatures may have overlooked some sources of systemic risk.

Posted at 7:00 am in Macroeconomics | Permalink

August 25, 2025

Are Financial Markets Good Predictors of R‑Star?

John C. Williams and Sophia Cho

Photo: Stock market graph trading analysis investment financial, stock exchange financial or forex graph stock market graph chart business crisis crash loss and grow up gain and profits win up trend.

Recently, there has been renewed attention on the natural rate of interest—often referred to as “r-star”—and whether it has risen from the historically low levels that prevailed before the COVID-19 pandemic. The natural interest rate is the real (inflation-adjusted) interest rate expected to prevail when supply and demand in the economy are in balance and inflation is stable. Some commentators claim that the prior decline in r‑star has reversed, pointing to the recent rise in future real interest rates implied by the bond market. But before declaring the death of this “low r‑star” era, a natural question to ask is: how reliable are market-based measures of r‑star? In this Liberty Street Economics post, we evaluate whether such measures provide additional information on future real interest rates beyond what is already contained in macroeconomic model-based estimates of r-star. Our findings suggest they do not, and we conclude that reports of the death of low r-star are greatly exaggerated.

Posted at 11:00 am in Inflation, Macroeconomics, Monetary Policy | Permalink | Comments (2)

August 13, 2025

How Firms Spread Good Management

Nicholas Bloom, Jonathan Hartley, Raffaella Sadun, Rachel Schuh, and John Van Reenen

Photo: Factory Digitalization: Two Industrial Engineers Use Tablet Computer, Big Data Statistics Visualization, Optimization of High-Tech Electronics Facility. Industry 4.0 Machinery Manufacturing Products

What is good management, and how is it transmitted across firms and plants? In a recent paper, we use survey and administrative data, coupled with a structural model of management, to explore these questions. We show that well-managed manufacturing firms—that is, firms that adopt more structured management practices described below—not only open and acquire more plants, but also close and sell more plants. Through this process, the firms transmit their management practices to new plants. These facts, taken together, imply that acquisitions can increase aggregate productivity by allowing well-managed firms to take over poorly managed plants and improve their management practices.

Posted at 7:00 am in Microeconomics | Permalink

Markets & Policy Implementation

Liberty Street Economics

Reading the Panic: How Investors Perceived Bank Risk During the 2023 Bank Run

The Financial Stability Implications of Tokenized Investment Funds

The Emergence of Tokenized Investment Funds and Their Use Cases

Financial Intermediaries and Pressures on International Capital Flows

The New York Fed DSGE Model Forecast—September 2025

Are Businesses Scaling Back Hiring Due to AI?

Economic Capital: A New Measure of Bank Solvency

What Is Natural Disaster Clustering—and Why Does It Matter for the Economy?

Are Financial Markets Good Predictors of R‑Star?

How Firms Spread Good Management

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