Liberty Street Economics

Liberty Street Economics

December 22, 2020

How Does Zombie Credit Affect Inflation? Lessons from Europe

Viral V. Acharya, Matteo Crosignani, Tim Eisert, and Christian Eufinger

Even after the unprecedented stimulus by central banks in Europe following the global financial crisis, Europe’s economic growth and inflation have remained depressed, consistently undershooting projections. In a striking resemblance to Japan’s “lost decades,” the European economy has been recently characterized by persistently low interest rates and the provision of cheap bank credit to impaired firms, or “zombie credit.” In this post, based on a recent staff report, we propose a “zombie credit channel” that links the rise of zombie credit to dis-inflationary pressures.

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Posted at 7:00 am in Credit, Financial Intermediation | Permalink
December 21, 2020

What’s Up with Stocks?

Fernando Duarte

“U.S. stocks are racing toward a second consecutive quarter of dramatic gains, continuing a historic stock-market recovery that few predicted in the depths of the March downturn,” said a September Wall Street Journal article. “The stock market is detached from economic reality. A reckoning is coming,” said the Washington Post. What is going on? In this post, I look not at what stocks have actually done or will do, but at what investors expected should have happened, and what they expect will happen going forward. It turns out that, at least by the particular measure of expectations I consider, investors expected stock returns to be high all along and continue to expect the same in the future.

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Posted at 7:00 am in Financial Markets, Stocks | Permalink
December 18, 2020

How Did Market Perceptions of the FOMC’s Reaction Function Change after the Fed’s Framework Review?

Ryan Bush, Haitham Jendoubi, Matthew Raskin, and Giorgio Topa

Survey data reveal a notable shift in market participants’ perceptions of the FOMC’s policy rate “reaction function” in the direction of higher expected inflation and lower expected unemployment ahead of the next rate “liftoff.”

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Posted at 7:00 am in Expectations, Inflation, Labor Market, Monetary Policy | Permalink
December 2, 2020

The Regional Economy during the Pandemic

Jaison R. Abel, Jason Bram, Richard Deitz, and Jonathan Hastings

The New York-Northern New Jersey region experienced an unprecedented downturn earlier this year, one more severe than that of the nation, and the region is still struggling to make up the ground that was lost. That is the key takeaway at an economic press briefing held today by the New York Fed examining economic conditions during the pandemic in the Federal Reserve’s Second District. Despite the substantial recovery so far, business activity, consumer spending, and employment are all still well below pre-pandemic levels in much of the region, and fiscal pressures are mounting for state and local governments. Importantly, job losses among lower-income workers and people of color have been particularly consequential. The pace of recovery was already slowing in the region before the most recent surge in coronavirus cases, and we are now seeing signs of renewed weakening as we enter the winter.

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Posted at 1:00 pm in Crisis, Employment, Household Finance, Inequality, Labor Market, New Jersey, New York, Pandemic, Regional Analysis, Unemployment | Permalink
December 1, 2020

The Costs of Corporate Debt Overhang Following the COVID‑19 Outbreak

Kristian S. Blickle and João A. C. Santos

Leading up to the COVID-19 outbreak, there were growing concerns about corporate sector indebtedness. High levels of borrowing may give rise to a “debt overhang” problem, particularly during downturns, whereby firms forego good investment opportunities because of an inability to raise additional funding. In this post, we show that firms with high levels of borrowing at the onset of the Great Recession underperformed in the following years, compared to similar—but less indebted—firms. These findings, together with early data on the revenue contractions following the COVID-19 outbreak, suggest that debt overhang during the COVID-recession could lead to an up to 10 percent decrease in growth for firms in industries most affected by the economic repercussions of the battle against the outbreak.

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Posted at 7:00 am in Corporate Finance, Credit, Crisis, Pandemic | Permalink | Comments (1)
November 30, 2020

Treasury Market When‑Issued Trading Activity

Michael Fleming, Or Shachar, and Peter Van Tassel

Despite the importance of when-issued trading of Treasury securities, and the advent of FINRA’s TRACE database of trading statistics, little is known publicly about the level of WI activity. In this post, the authors address this gap by analyzing WI transactions recorded in TRACE.

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Posted at 7:00 am in Financial Markets, Treasury | Permalink
November 24, 2020

How Bank Reserves Are Distributed Matters. How You Measure Their Distribution Matters Too.

Gara Afonso, Marco Cipriani, Steph Clampitt, Haitham Jendoubi, Gabriele La Spada, and Will Riordan

Changes in the distribution of banks’ reserve balances are important since they may impact conditions in the federal funds market and alter trading dynamics in money markets more generally. In this post, we propose using the Lorenz curve and Gini coefficient as a new approach to measuring reserve concentration. Since 2013, concentration, as captured by the Lorenz curve and the Gini coefficient, has co-moved with aggregate reserves, decreasing as aggregate reserves declined (such as in 2015-18) and increasing as aggregate reserves increased (such as at the onset of the COVID-19 pandemic).

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Posted at 7:00 am in Bank Capital, Banks, Fed Funds, Federal Reserve, Financial Markets, Inequality, Panic | Permalink
November 23, 2020

Monetizing Privacy with Central Bank Digital Currencies

Rod Garratt and Michael Lee

In prior research, we documented evidence suggesting that digital payment adoptions have accelerated as a result of the pandemic. While digitalization of payment activity improves data utilization by firms, it can also infringe upon consumers’ right to privacy. Drawing from a recent paper, this blog post explains how payment data acquired by firms impacts market structure and consumer welfare. Then, we discuss the implications of introducing a central bank digital currency (CBDC) that offers consumers a low-cost, privacy-preserving electronic means of payment—essentially, digital cash.

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Posted at 7:00 am in Central Bank, Cryptocurrencies | Permalink
November 18, 2020

The Impact of Natural Disasters on the Corporate Loan Market

Ivan T. Ivanov, Marco Macchiavelli, and João A.C. Santos

Natural disasters are usually associated with an increase in the demand for credit by both households and companies in the affected regions. However, if capacity constraints preclude banks from meeting the local increase in demand, the banks may reduce lending elsewhere, thus propagating the shock to unaffected areas. In this post, we analyze the corporate loan market and find that banks, particularly those with lower capital, reduce credit provisioning to distant regions unaffected by natural disasters. We also find that shadow banks only partially offset the reduction in bank credit, so borrowers in regions unaffected by natural disasters experience a decline in credit supply.

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Posted at 7:00 am in Banks, Financial Intermediation | Permalink
November 17, 2020

Following Borrowers through Forbearance

Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klaauw

Today, the New York Fed’s Center for Microeconomic Data reported that total household debt balances increased slightly in the third quarter of 2020, according to the latest Quarterly Report on Household Debt and Credit. This increase marked a reversal from the modest decline in the second quarter of 2020, a downturn driven by a sharp contraction in credit card balances. In the third quarter, credit card balances declined again, even as consumer spending recovered somewhat; meanwhile, mortgage originations came in at a robust $1.049 trillion, the highest level since 2003. Many of the efforts to stabilize the economy in response to the COVID-19 crisis have focused on consumer balance sheets, both through direct cash transfers and through forbearances on federally backed debts. Here, we examine the uptake of forbearances on mortgage and auto loans and its impact on their delinquency status and the borrower’s credit score. This analysis, as well as the Quarterly Report on Household Debt and Credit, is based on anonymized Equifax credit report data.

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Posted at 11:00 am in Credit, Household Finance, Housing | Permalink
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Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

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  1. Delinquency Is Increasingly in the Cards for Maxed-Out Borrowers
  2. What Was Up with Grocery Prices?
  3. Auto Loan Delinquency Revs Up as Car Prices Stress Budgets
  4. Taking Stock: Dollar Assets, Gold, and Official Foreign Exchange Reserves
  5. How and Why Do Consumers Use “Buy Now, Pay Later”?
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