329 posts on "Liberty Street Economics"
October 16, 2025
The Shadow Value of Central Bank Lending
After the Great Financial Crisis, the European Central Bank (ECB) extended its monetary policy toolbox to include the use of long-term loans to banks at interest rates close to zero or even negative. These central bank interventions were aimed at supporting the transmission of expansionary monetary policy and likely played a crucial role in bolstering the financial stability of the euro area, namely by reducing the chance of bank runs. However, quantitative evidence on the effects of these interventions on financial stability remains scant. In this post, we quantify the effectiveness of central bank lending programs in supporting financial stability through the lens of a novel structural model discussed in this paper.
October 8, 2025
The Rise of Sponsored Service for Clearing Repo
Recently instituted rule amendments have initiated a large migration of dealer-to-client Treasury repurchase trades to central clearing. To date, the main avenue used to access central clearing is Sponsored Service, a clearing product that has, until now, received little attention. This post highlights the results from a recent Staff Report which presents a deep dive into Sponsored Service. Here, we summarize the description of the institutional details of this service and its costs and benefits. We then document some basic facts on how market participants use this service, based on confidential data.
October 6, 2025
A Country‑Specific View of Tariffs
U.S. trade policy remains in flux. Nevertheless, important elements of the new policy regime are apparent in data through July. What stands out are the large differences in realized tariff rates by trading partner, ranging from less than 5 percent for Canada and Mexico to 15 percent for Japan and to 40 percent for China. This post shows that the bulk of cross-country differences in tariff rates is explained by two factors: the U.S.-Canada-Mexico free trade agreement and differing sales shares in tariff-exempt categories.
September 30, 2025
Calming the Panic: Investor Risk Perceptions and the Fed’s Emergency Lending during the 2023 Bank Run
In a companion post, we showed that during the bank run of spring 2023 investors were seemingly not concerned about bank risk broadly but rather became sensitized to the risk of only about a third of all publicly traded banks. In this post, we investigate how the Federal Reserve’s liquidity support affected investor risk perceptions during the run. We find that the announcement of the Fed’s novel Bank Term Funding Program (BTFP), and subsequent borrowings from the program, substantially reduced investor risk perceptions. However, borrowings from the Fed’s traditional discount window (DW) had no such effect.
September 24, 2025
The Financial Stability Implications of Tokenized Investment Funds
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.
The Emergence of Tokenized Investment Funds and Their Use Cases
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.
September 22, 2025
Financial Intermediaries and Pressures on International Capital Flows
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 4, 2025
Are Businesses Scaling Back Hiring Due to AI?
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.
August 25, 2025
Are Financial Markets Good Predictors of R‑Star?
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.
August 7, 2025
Flood Risk and Flood Insurance
Recent natural disasters have renewed concerns about insurance markets for natural disaster relief. In January 2025, wildfires wreaked havoc in residential areas outside of Los Angeles. Direct damage estimates for the Los Angeles wildfires range from $76 billion to $131 billion, with only up to $45 billion of insured losses (Li and Yu, 2025). In this post, we examine the state of another disaster insurance market: the flood insurance market. We review features of flood insurance mandates, flood insurance take-up, and connect this to work in a related Staff Report that explores how mortgage lenders manage their exposure to flood risk. Mortgages are a transmission channel for monetary policy and also an important financial product for both banks and nonbank lenders that actively participate in the mortgage market.
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