Liberty Street Economics

Liberty Street Economics

July 2, 2024

On the Distributional Effects of Inflation and Inflation Stabilization

Marco Del Negro, Keshav Dogra, Pranay Gundam, Donggyu Lee, and Brian Pacula

decorative photo: curled up shopping receipt with the word price at that top.

This post and the next discuss the distributional effects of inflation and inflation stabilization through the lenses of a theoretical model—a Heterogeneous Agent New Keynesian (HANK) model. This model combines the features of New Keynesian models that have been the workhorse for monetary policy analysis since the work of Woodford (2003) with inequality in wealth and income at the household level following the seminal contribution of Kaplan, Moll, and Violante (2018). We find that while inflation hurts everyone, it hurts the poor in particular. When the source of inflation is a supply shock, fighting inflation aggressively hurts the poor even more, however, while the opposite is true for demand shocks, as discussed in the companion post.

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Posted at 7:00 am in Inequality, Inflation, Monetary Policy | Permalink
July 1, 2024

Exploring the TIPS‑Treasury Valuation Puzzle

Guillaume Roussellet

Decorative image: Treasury Department

Since the late 1990s, the U.S. Treasury has issued debt in two main forms: nominal bonds, which provide fixed-cash scheduled payments, and Treasury Inflation Protected Securities—or TIPS—which provide the holder with inflation-protected payments that rise with U.S. inflation. At the heart of their relative valuation lie market participants’ expectations of future inflation, an object of interest for academics, policymakers, and investors alike. After briefly reviewing the theoretical and empirical links between TIPS and Treasury yields, this post, based on a recent research paper, explores whether market perceptions of U.S. sovereign credit risk can help explain the relative valuation of these financial instruments.

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Posted at 7:00 am in Treasury | Permalink
June 28, 2024

Racial and Ethnic Inequalities in Household Wealth Persist 

Rajashri Chakrabarti, Natalia Emanuel, and Ben Lahey 

Decorative image: African American Man holding coins in his had showing money disparity.

Disparities in wealth are pronounced across racial and ethnic groups in the United States. As part of an ongoing series on inequality and equitable growth, we have been documenting the evolution of these gaps between Black, Hispanic, and white households, in this case from the first quarter of 2019 to the fourth quarter of 2023 for a variety of assets and liabilities for a pandemic-era picture. We find that real wealth grew and that the pace of growth for Black, Hispanic, and white households was very similar across this timeframe—yet gaps across groups persist. 

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Posted at 7:00 am in Equitable Growth, Household Finance, Inequality, Pandemic | Permalink
June 24, 2024

Deciphering the Disinflation Process

Sebastian Heise and Ayşegül Şahin

Photo: stacked shipping containers with a few worked in hard hats walking along side.

U.S. inflation surged in the early post-COVID period, driven by several economic shocks such as supply chain disruptions and labor supply constraints. Following its peak at 6.6 percent in September 2022, core consumer price index (CPI) inflation has come down rapidly over the last two years, falling to 3.6 percent recently. What explains the rapid shifts in U.S. inflation dynamics? In a recent paper, we show that the interaction between supply chain pressures and labor market tightness amplified the inflation surge in 2021. In this post, we argue that these same forces that drove the nonlinear rise in inflation have worked in reverse since late 2022, accelerating the disinflationary process. The current episode contrasts with periods where the economy was hit by shocks to either imported inputs or to labor alone.

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Posted at 7:00 am in Inflation, Supply Chain | Permalink | Comments (1)
June 20, 2024

The Growing Risk of Spillovers and Spillbacks in the Bank‑NBFI Nexus

Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman

Decorative image: View of high rise glass building and dark steel in London

Nonbank financial institutions (NBFIs) are growing, but banks support that growth via funding and liquidity insurance. The transformation of activities and risks from banks to a bank-NBFI nexus may have benefits in normal states of the world, as it may result in overall growth in (especially, credit) markets and widen access to a wide range of financial services, but the system may be disproportionately exposed to financial and economic instability when aggregate tail risk materializes. In this post, we consider the systemic implications of the observed build-up of bank-NBFI connections associated with the growth of NBFIs.

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Posted at 7:00 am in Banks, Financial Intermediation, Nonbank (NBFI), Systemic Risk | Permalink
June 18, 2024

Banks and Nonbanks Are Not Separate, but Interwoven

Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman

Decorative image: View of high rise glass building and dark steel in London

In our previous post, we documented the significant growth of nonbank financial institutions (NBFIs) over the past decade, but also argued for and showed evidence of NBFIs’ dependence on banks for funding and liquidity support. In this post, we explain that the observed growth of NBFIs reflects banks optimally changing their business models in response to factors such as regulation, rather than banks stepping away from lending and risky activities and being substituted by NBFIs. The enduring bank-NBFI nexus is best understood as an ever-evolving transformation of risks that were hitherto with banks but are now being repackaged between banks and NBFIs.

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Posted at 7:00 am in Banks, Nonbank (NBFI) | Permalink
June 17, 2024

Nonbanks Are Growing but Their Growth Is Heavily Supported by Banks

Viral V. Acharya, Nicola Cetorelli, and Bruce Tuckman

Decorative image: View of high rise glass building and dark steel in London

Traditional approaches to financial sector regulation view banks and nonbank financial institutions (NBFIs) as substitutes, one inside and the other outside the perimeter of prudential regulation, with the growth of one implying the shrinking of the other. In this post, we argue instead that banks and NBFIs are better described as intimately interconnected, with NBFIs being especially dependent on banks both for term loans and lines of credit.

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Posted at 7:00 am in Credit, Nonbank (NBFI) | Permalink
June 14, 2024

The New York Fed DSGE Model Forecast—June 2024

Marco Del Negro, Pranay Gundam, Donggyu Lee, Ramya Nallamotu, and Brian Pacula

decorative illustration: chart and stock prices background.

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 March 2024. As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A.

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Posted at 9:00 am in DSGE | Permalink
May 31, 2024

Can Discount Window Stigma Be Cured? 

Olivier Armantier

close up photo of the federal reserve building

One of the core responsibilities of central banks is to act as “lender of last resort” to the financial system. In the U.S., the Federal Reserve has been operating as a lender of last resort through its “discount window” (DW) for more than a century. Historically, however, the DW has been plagued by stigma—banks’ reluctance to use the DW, even for benign reasons, out of concerns that it could be interpreted as a sign of financial weakness. In this post, we report on new research showing that once a DW facility is stigmatized, removing that stigma is difficult.

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Posted at 9:00 am in Central Bank, Monetary Policy | Permalink

Thinking of Pursuing a PhD in Economics? Info on Graduate School and Beyond

Kasey Chatterji-Len and Anna Kovner

Photo of three young students writing a formula on a green blackboard with white chalk.

Becoming a PhD economist can provide a fulfilling and financially secure career path. However, getting started in the field can be daunting if you don’t know much about the preparation you’ll need and the available job opportunities. If you’re wondering what it means to be an economics researcher or how to become one, please read on. We’ll review how to prepare for a career in economics research, what an economics PhD program entails, and what types of opportunities it might bring. Economic education is a core component of the Federal Reserve Bank of New York’s mission to serve the community. To empower would-be economists, this post provides information for students who seek a career in economics research. We hope this information will be helpful to students interested in economics, regardless of their background and economic situation.  This information is most applicable to students applying to programs in the United States.  

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Posted at 7:00 am in Education | Permalink
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