Liberty Street Economics

Liberty Street Economics

September 24, 2020

The Official Sector’s Response to the Coronavirus Pandemic and Moral Hazard

Anna Kovner and Antoine Martin

Any time the Federal Reserve or the official sector more broadly provides support to the economy during a crisis, the intervention raises concerns related to moral hazard. Moral hazard can occur when market participants do not bear the negative consequences of the risks they take. This lack of consequences can encourage even greater risks, due to the expectation of future government help. In this post, we consider the potential for moral hazard stemming from the Fed’s response to the coronavirus pandemic and explain why moral hazard concerns were likely more severe in 2008.

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Posted at 7:00 am in Pandemic | Permalink
September 23, 2020

Market Failures and Official Sector Interventions

Anna Kovner and Antoine Martin

In the United States and other free market economies, the official sector typically has minimal involvement in market activities absent a clear rationale to justify intervention, such as a market failure. In this post, we consider arguments for official sector intervention, focusing on the market failure arising from externalities related to business closures. These externalities are likely to be particularly high for closures arising from pandemic-related economic disruptions. We discuss how the official sector, including institutions such as Congress and the Treasury, can increase social welfare by acting to minimize the fixed costs of business start-up and failure, including the costs associated with unemployment, beyond the level set by private markets alone.

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Posted at 7:00 am in Pandemic | Permalink
September 22, 2020

Expanding the Toolkit: Facilities Established to Respond to the COVID‑19 Pandemic

Anna Kovner and Antoine Martin

Anna Kovner and Antoine Martin argue that the “credit” and lending facilities established by the Fed in response to the COVID-19 pandemic, while unprecedented, are a natural extension of the central bank’s existing toolkit.

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Posted at 7:00 am in Central Bank, Crisis, Federal Reserve, Liquidity, Monetary Policy, Pandemic | Permalink
September 21, 2020

How Did State Reopenings Affect Small Businesses?

Rajashri Chakrabarti, Sebastian Heise, Davide Melcangi, Maxim Pinkovskiy, and Giorgio Topa

In our previous post, we looked at the effects that the reopening of state economies across the United States has had on consumer spending. We found a significant effect of reopening, especially regarding spending in restaurants and bars as well as in the healthcare sector. In this companion post, we focus specifically on small businesses, using two different sources of high-frequency data, and we employ a methodology similar to that of our previous post to study the effects of reopening on small business activity along various dimensions. Our results indicate that, much like for consumer spending, reopenings had positive and significant effects in the short term on small business revenues, the number of active merchants, and the number of employees working in small businesses. It is important to stress that we are not expressing any views in this post on the normative question of whether, when, or how states should loosen or tighten restrictions aimed at controlling the COVID-19 pandemic.

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Posted at 7:00 am in Crisis, Employment, Household Finance, Labor Market, Macroeconomics, Pandemic, Unemployment | Permalink
September 18, 2020

Did State Reopenings Increase Consumer Spending?

Rajashri Chakrabarti, Sebastian Heise, Davide Melcangi, Maxim Pinkovskiy, and Giorgio Topa

The spread of COVID-19 in the United States has had a profound impact on economic activity. Beginning in March, most states imposed severe restrictions on households and businesses to slow the spread of the virus. This was followed by a gradual loosening of restrictions (“reopening”) starting in April. As the virus has re-emerged over the last few weeks, a number of states have taken steps to reverse the reopening of their economies. For example, Texas and Florida closed bars again in June, and Arizona additionally paused operations of gyms and movie theatres. Taken together, these measures raise the question of how closures and reopenings affect consumer spending. In this post, we investigate how much consumer spending increased after the reopenings. It is important to stress that we are not expressing any views on the normative question of whether, when, or how states should loosen or tighten restrictions aimed at controlling the COVID-19 pandemic.

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Posted at 10:03 am in Macroeconomics, Pandemic | Permalink | Comments (2)

What’s Up with the Phillips Curve?

William Chen, Marco Del Negro, Michele Lenza, Giorgio Primiceri, and Andrea Tambalotti

U.S. inflation used to rise during economic booms, as businesses charged higher prices to cope with increases in wages and other costs. When the economy cooled and joblessness rose, inflation declined. This pattern changed around 1990. Since then, U.S. inflation has been remarkably stable, even though economic activity and unemployment have continued to fluctuate. For example, during the Great Recession unemployment reached 10 percent, but inflation barely dipped below 1 percent. More recently, even with unemployment as low as 3.5 percent, inflation remained stuck under 2 percent. What explains the emergence of this disconnect between inflation and unemployment? This is the question we address in “What’s Up with the Phillips Curve?,” published recently in Brookings Papers on Economic Activity.

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Posted at 7:00 am in DSGE, Inflation, Macroeconomics, Monetary Policy, Unemployment | Permalink | Comments (3)
August 27, 2020

Tracking the Spread of COVID‑19 in the Region

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

The New York Fed today unveiled a set of charts that track COVID-19 cases in the Federal Reserve’s Second District, which includes New York, Northern New Jersey, Fairfield County Connecticut, Puerto Rico, and the U.S. Virgin Islands. These charts, available in the Indicators section of our Regional Economy webpage, are updated daily with the latest data on confirmed COVID-19 cases from The New York Times, which compiles information from state and local health agencies. Case counts are measured as the seven-day average of new reported daily cases and are presented on a per capita basis to allow comparisons to the nation and between communities in the region. Recent data indicate that after spiking to extraordinary levels in April, new cases have remained relatively low and stable in and around New York City, and in upstate New York. By contrast, cases have been trending higher in Puerto Rico and the U.S. Virgin Islands since mid-July.

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Posted at 7:00 am in New Jersey, New York, Pandemic, Regional Analysis | Permalink
August 26, 2020

How Does the Liquidity of New Treasury Securities Evolve?

Michael Fleming

In a recent Liberty Street Economics post, we showed that the newly reintroduced 20-year bond trades less than other on-the-run Treasury securities and has similar liquidity to that of the more interest‑rate‑sensitive 30-year bond. Is it common for newly introduced securities to trade less and with higher transaction costs, and how does security trading behavior change over time? In this post, we look back at how liquidity evolved for earlier reintroductions of Treasury securities so as to gain insight into how liquidity might evolve for the new 20-year bond.

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Posted at 7:00 am in Financial Markets | Permalink | Comments (3)
August 24, 2020

Explaining the Puzzling Behavior of Short‑Term Money Market Rates

Antoine Martin, James J. McAndrews, Ali Palida, and David Skeie

Since 2008, the Federal Reserve has dramatically increased the supply of bank reserves, effectively adopting a floor system for monetary policy implementation. Since then, the behavior of short-term money market rates has been at times puzzling. In particular, short-term rates have been surprisingly firm in recent months, despite the large increase in reserves by the Fed as a part of its response to the coronavirus pandemic. In this post, we provide evidence that both the supply of reserves and the supply of short-term Treasury securities are important factors for explaining short-term rates.

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Posted at 7:00 am in Fed Funds, Federal Reserve, Liquidity, Treasury | Permalink
August 20, 2020

Market Function Purchases by the Federal Reserve

Kenneth D. Garbade and Frank M. Keane

This post describes efforts taken by the Federal Reserve to support and sustain the Treasury and MBS markets following the COVID-19 outbreak as well as prior “market functioning” interventions in 1939, 1958, and 1970.

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