Federal Reserve Bank of New York Number 4 2009 Resea rchUpdate Research and Statistics Group www.newyorkfed.org/research

New Study Explains Buildup of Reserves in U.S. Banking System as a By-Product of Fed’s Liquidity Programs

or some observers, the rapid growth bank’s vault or ATMs, that can be used of excess reserves in the U.S. bank - to meet the bank’s legal reserve require - Fing system during the financial crisis ment. Between September 2008 and the has been a troubling development—a sign end of 2009, reserves surged from about that banks are “hoarding” funds rather $45 billion to more than $900 billion. than lending them out and hence that the Excess reserves—the portion of reserves Federal Reserve’s efforts to restore the remaining after a bank has met its legal flow of credit to firms and households requirement—accounted for the bulk of have faltered. In “Why Are Banks the increase. Holding So Many Excess Reserves?” To explain this surge, Keister and (Current Issues in Economics and Finance , McAndrews present simple examples vol. 15, no. 8), authors Todd Keister and that show how the types of actions taken James McAndrews dispute this view. by central banks to ease liquidity strains Using a series of examples to illustrate during the financial crisis—loans to how reserves are created, they demon - banks and other firms as well as direct strate that the buildup of excess reserves purchases of assets—create large quanti - is simply a by-product of the lending ties of reserves. The level of reserves in facilities and asset purchase programs a country’s banking system, the authors established by the Federal Reserve during observe, is determined almost entirely by the financial crisis. The very high level of the central bank’s actions. By contrast, reserves, the authors con - the actions of individual banks will have tend, reflects the large scale of the Fed’s initia - Also in this issue… tives, but conveys no infor - mation about the lending Most downloaded publications ...... 2 behavior of banks. Staff Reports: New titles ...... 3 As the authors explain, Papers recently published by Research reserves are funds held by Group economists ...... 11 a bank, either as balances Papers presented at conferences ...... 11 on deposit at the Federal Publications and papers: October-December ...... 13 Reserve or as cash in the RVoelsuemarech9,UNpduamtbeerI 4N,u2m0b0e6r 4, 2009

no effect on aggregate reserves: As the In the final section of the article, authors’ examples show, an individual Keister and McAndrews discuss the bank can lower its reserves by lending importance of paying interest on them out or using them to purchase other reserves—as the Fed began to do in assets, but its actions simply transfer the October 2008—when the level of excess funds to other banks’ reserve accounts reserves is unusually high: “Paying inter - and do not alter the total level of reserves est on reserves allows a central bank to in the banking system. Thus, the current maintain its influence over market inter - high level of reserves in the U.S. banking est rates irrespective of the quantity of system reflects the scale of the Federal reserves in the banking system. The cen - Reserve’s recent policy initiatives and tral bank can then scale its policy initiatives cannot be interpreted as evidence that according to conditions in the financial banks are stockpiling funds rather than sector, while setting its target for the 2 lending them out. short-term interest rate in response to macroeconomic conditions.” I

Most Downloaded Publications

Listed below are the most sought after SSRN website, 2009: Research Group articles and papers from I “Understanding the Securitization of the New York Fed’s website and from the Subprime Mortgage Credit,” by Adam Bank’s page on the Social Science B. Ashcraft and Til Schuermann ( Staff Research Network site (www.ssrn.com/link/ Reports , no. 318, March 2008) – FRB-New-York.html ). 8,316 downloads New York Fed website, 2009: I “The Consolidation of the Financial I “Understanding the Securitization of Services Industry: Causes, Consequences, Subprime Mortgage Credit,” by Adam and Implications for the Future,” Allen B. Ashcraft and Til Schuermann ( Staff N. Berger, Rebecca S. Demsetz, and Reports , no. 318, March 2008) – Philip E. Strahan ( Staff Reports , no. 55, 12,769 downloads December 1998) – 2,524 downloads I “The Yield Curve as a Predictor of I “An Empirical Analysis of Stock U.S. Recessions,” by Arturo Estrella and Bond Market Liquidity,” Tarun and Frederic S. Mishkin ( Current Chordia, Asani Sarkar, and Avanidhar Issues in Economics and Finance , vol. 2, Subrahmanyam ( Staff Reports , no. 164, no. 7, June 1996) – 10,002 downloads March 2003) – 1,933 downloads I “Why Are Banks Holding So Many For lists of the top-ten downloads, Excess Reserves?” by Todd Keister visit www.newyorkfed.org/research/ and James McAndrews ( Staff Reports , top_downloaded/index.html . no. 380, July 2009) – 8,749 downloads

Federal Reserve Bank of New York www.newyorkfed.org/research

New Titles in the Staff the Federal Reserve Act to cushion the strains on financial intermediaries’ balance Reports Series sheets and thereby target the unusually wide spreads in various credit markets. The following new staff reports are avail - While classic monetary policy targets a able at price—for example, the federal funds rate— www.newyorkfed.org/research/staff_reports . the liquidity facilities affect balance sheet quantities. The financial crisis forcefully MACROECONOMICS demonstrated that the collapse of the AND GROWTH financial sector’s balance sheet capacity can have powerful adverse effects on the No. 396, October 2009 real economy. This study reexamines the Prices and Quantities in the Monetary distinctions between prices and quantities Policy Transmission Mechanism in monetary policy transmission. Tobias Adrian and Hyun Song Shin Central banks have various tools for imple - No. 397, October 2009 3 menting monetary policy, but the tool Monetary Tightening Cycles and receiving the most attention in the litera - the Predictability of Economic Activity Arturo Estrella and Tobias Adrian ture has been the overnight interest rate. The financial crisis that erupted in the Eleven of fourteen monetary tightening summer of 2007 has refocused attention on cycles since 1955 were followed by increases other channels of monetary policy, notably in unemployment; three were not. The the transmission of policy through the sup - term spread at the end of these cycles ply of credit and overall conditions in the discriminates almost perfectly between capital markets. In 2008, the Federal subsequent outcomes, but levels of nominal Reserve put into place various lender-of- or real interest rates, as well as other last-resort programs under section 13(3) of interest rate spreads, generally do not.

Publications and Papers

The Research and Statistics Group produces a wide range of publications: I The Economic Policy Review —a policy-oriented journal focusing on economic and financial market issues. I EPR Executive Summaries —online versions of selected Economic Policy Review articles, in abridged form. I Current Issues in Economics and Finance —concise studies of topical economic and financial issues. I Second District Highlights —a regional supplement to Current Issues . I Staff Reports —technical papers intended for publication in leading economic and finance journals, available only online. I Publications and Other Research —an annual catalogue of our research output.

Research and Statistics Group Research Update I Number 4, 2009

No. 398, October 2009 characteristics of U.S. labor market data. Financial Intermediaries and First, individual consumption is affected by Monetary Economics the number of hours worked: Employed Tobias Adrian and Hyun Song Shin agents consume more on average than the This study reconsiders the role of financial unemployed do. Second, changes in the intermediaries in monetary economics. employment rate, a central factor explain - Adrian and Shin explore the hypothesis ing variation in total hours, affect aggregate that financial intermediaries drive the busi - consumption. Demand shocks—such as ness cycle by way of their role in determin - shifts in the marginal efficiency of investment ing the price of risk. In this framework, as well as government spending shocks and balance sheet quantities emerge as a key news shocks—are shown to generate eco - indicator of risk appetite and hence of the nomic fluctuations consistent with observed “risk-taking channel” of monetary policy. business cycles. The authors document evidence that the balance sheets of financial intermediaries No. 404, November 2009 4 reflect the transmission of monetary policy Conventional and Unconventional through capital market conditions. They Monetary Policy find short-term interest rates to be impor - Vasco Cúrdia and Michael Woodford tant in influencing the size of financial Cúrdia and Woodford extend a standard intermediary balance sheets. The findings New Keynesian model both to incorporate suggest that the traditional focus on the heterogeneity in spending opportunities money stock for the conduct of monetary along with two sources of (potentially time- policy may have more modern counter - varying) credit spreads and to allow a role parts, and point to the importance of track - for the central bank’s balance sheet in ing balance sheet quantities for the con - determining equilibrium. They use the duct of monetary policy. model to investigate the implications of imperfect financial intermediation for No. 399, October 2009 familiar monetary policy prescriptions and Labor Supply Heterogeneity and to consider additional dimensions of cen - Macroeconomic Comovement tral bank policy—variations in the size and Stefano Eusepi and Bruce Preston composition of the central bank’s balance Standard real business cycle models must sheet as well as payment of interest on rely on total factor productivity (TFP) reserves—alongside the traditional question shocks to explain the observed comove - of the proper operating target for an ment of consumption, investment, and overnight policy rate. The authors also hours worked. This paper shows that a study the special problems that arise when neoclassical model consistent with the zero lower bound for the policy rate is observed heterogeneity in labor supply and reached. They show that it is possible to consumption can generate comovement in provide criteria for the choice of policy the absence of TFP shocks. Intertemporal along each of these possible dimensions substitution of goods and leisure induces within a single unified framework, and to comovement over the business cycle achieve policy prescriptions that apply through heterogeneity in the consumption equally well regardless of whether financial behavior of employed and unemployed markets work efficiently and whether the workers. This result stems from two model zero bound on nominal interest rates is features introduced to capture important reached.

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No. 407, November 2009 gate growth. A detailed examination of How Rigid Are Producer Prices? these sectors’ direct contributions to GDP, Pinelopi Koujianou Goldberg however, suggests that overstatements of and Rebecca Hellerstein past growth would likely not have made a Conventional wisdom suggests that producer large difference in recorded GDP growth. prices are more rigid than consumer prices Slower growth in these sectors would have, and thus they play less of an allocative role at most, a moderate direct effect on aggre - than do consumer prices. Analyzing 1987-2008 gate activity. The recent experience’s longer Bureau of Labor Statistics microdata for term effects on GDP would seem to stem the producer price index, the authors find largely from factors other than retrenchment that producer prices for finished goods and in these sectors. services in fact exhibit roughly the same No. 411, December 2009 rigidity as consumer prices that include Investment Shocks and the Relative Price sales and substantially less rigidity than of Investment consumer prices that exclude them. Alejandro Justiniano, Giorgio E. Primiceri, 5 Moreover, large firms change prices two to and Andrea Tambalotti three times more frequently than small firms do, and by smaller amounts, particu - The authors estimate a New Neoclassical larly when prices decrease. Longer price Synthesis model of the business cycle with durations are associated with larger price two investment shocks. The first, an invest - changes, although considerable hetero - ment-specific technology shock, affects the geneity exists. Long-term contracts are transformation of consumption into invest - associated with somewhat greater price ment goods and is identified with the rela - rigidity for goods and services. The size of tive price of investment. The second shock price decreases plays a key role in inflation affects the production of installed capital dynamics, while the size of price increases from investment goods or, more broadly, does not. The frequencies of price increases the transformation of savings into future and decreases tend to move together and capital input. The study finds that this shock so cancel one another out. is the most important driver of U.S. business cycle fluctuations in the postwar period No. 408, November 2009 and that it is likely to proxy for more fun - Implications of the Financial Crisis damental disturbances to the functioning for Potential Growth: Past, Present, of the financial sector. To corroborate this and Future interpretation, the authors show that the Charles Steindel shock correlates strongly with interest rate spreads and that it played a particularly The scale of the recent collapse in asset important role in the recession of 2008. values and the magnitude of the recession suggest that activities connected to the increase in values over the 2002-07 period — No. 418, December 2009 notably, expansion of the financial markets, The Homeownership Gap homebuilding, and real estate—were over - Andrew Haughwout, Richard Peach, and Joseph Tracy stated. If this is true, aggregate U.S. eco - nomic growth would have been overstated, After rising for a decade, the U.S. home - implying that previous rates of potential ownership rate peaked at 69 percent in the GDP growth may also have been overstated third quarter of 2006. Over the next two and that the trajectory of potential GDP and a half years, as home prices fell in may be slower going forward. Slowing many parts of the country and the unem - growth in the finance, homebuilding, and ployment rate rose sharply, the homeown - real estate sectors could hold back aggre - ership rate declined by 1.7 percentage

Research and Statistics Group Research Update I Number 4, 2009

points. An important question is, How No. 420, December 2009 much more will this rate decline over the Real-Time Underlying Inflation Gauges current economic downturn? To address for Monetary Policymakers this question, Haughwout, Peach, and Marlene Amstad and Simon Potter Tracy propose the concept of the “home - Central banks analyze a wide range of data ownership gap” as a gauge of downward to obtain better measures of underlying pressure on the homeownership rate. They inflationary pressures. Factor models have define the homeownership gap as the dif - been widely used to formalize this proce - ference between the “official” homeowner - dure. Using a dynamic factor model, this ship rate and a recomputed rate that paper develops a measure of underlying excludes owners who are in a negative inflation (UIG) at time horizons of rele - equity position, meaning that the value of vance for monetary policymakers for both their houses is less than the outstanding consumer price index inflation and personal mortgage balance. Their estimate of this consumption expenditures inflation. The gap suggests that the official homeowner - UIG uses a broad data set allowing for 6 ship rate will likely experience significant high-frequency updates on underlying downward pressure in the coming years. inflation. The paper complements the No. 419, December 2009 existing literature on U.S. “core” measures Estimating the Cross-Sectional by illustrating how UIG has been used and Distribution of Price Stickiness interpreted in real time since late 2005. from Aggregate Data Carlos Carvalho and Niels Arne Dam INTERNATIONAL This study estimates a multisector sticky- price model for the U.S. economy in which No. 400, October 2009 the degree of price stickiness is allowed to The Determinants of International vary across sectors. For this purpose, the Flows of U.S. Currency Rebecca Hellerstein and William Ryan authors use a specification that allows them to extract information about the This paper examines the determinants of underlying cross-sectional distribution from cross-border flows of U.S. dollar banknotes, aggregate data. Estimating the model using using a new panel data set of bilateral flows only aggregate data on nominal and real between the United States and 103 coun - output, they find that the inferred distribu - tries from 1990 to 2007. Hellerstein and tion of price stickiness is strikingly similar Ryan show that a gravity model explains to the empirical distribution constructed international flows of currency as well as it from the recent microeconomic evidence explains international flows of goods and on price setting in the U.S. economy. The financial assets. They find important roles authors also explore their Bayesian for market size and transaction costs, con - approach to combine the aggregate time- sistent with the traditional gravity frame - series data with the microeconomic infor - work, as well as roles for financial depth, mation on the distribution of price rigidity. the behavior of the nominal exchange rate, Their results show that allowing for this the size of the informal sector, the amount type of heterogeneity is critically important of remittance credits, the degree of compe - to understanding the joint dynamics of out - tition with the euro, and the history of put and prices, and it constitutes a step macroeconomic instability over the previ - toward reconciling the extent of nominal ous generation. The study finds no role for price rigidity implied by aggregate data official trade flows of goods. Its results thus with the evidence from microeconomic confirm several hypotheses about the data on price stickiness. determinants of using a secondary currency.

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No. 405, November 2009 tal. Moreover, the authors show that Micro, Macro, and Strategic Forces spillovers from academic R&D activities tilt in International Trade Invoicing the structure of local labor markets toward Linda S. Goldberg and Cédric Tille occupations requiring innovation and tech - The use of different currencies in the nical training. These findings demonstrate invoicing of international trade transactions that colleges and universities raise local plays a major role in the international human capital levels by increasing both transmission of economic fluctuations. the supply of and demand for skill. Existing studies argue that an exporter’s No. 410, December 2009 invoicing choice reflects structural aspects Real-Time Search in the Laboratory of its industry, such as market share and and the Market the price sensitivity of demand, as well as Meta Brown, Christopher J. Flinn, the hedging of marginal costs (attributable, and Andrew Schotter for instance, to the use of imported inputs) and macroeconomic volatility. Goldberg While widely accepted models of labor and Tille use a new, highly disaggregated market search imply a constant reservation 7 data set to assess the roles of the various wage policy, the empirical evidence strongly invoicing determinants. Their findings sup - suggests that reservation wages decline in the port the factors identified in the literature duration of search. This paper reports the and document a new feature: a link results of the first real-time-search labora - between shipment size and invoicing. tory experiment. The controlled environ - Specifically, larger transactions are more ment that subjects face is stationary, and likely to be invoiced in the importer’s cur - the payoff-maximizing reservation wage is rency. The authors offer a theoretical constant. Nevertheless, the subjects’ reser - explanation for the empirical link between vation wages decline sharply over time. transaction size and invoicing by allowing The authors investigate two hypotheses to invoicing to be set through bargaining explain this decline: 1) searchers respond between exporters and importers, a feature to the stock of accruing search costs and absent from existing models despite its 2) searchers experience nonstationary sub - empirical relevance. jective costs of time spent searching. The study’s data support the latter hypothesis, and the authors substantiate this conclusion MICROECONOMICS both experimentally and econometrically.

No. 401, October 2009 No. 417, December 2009 Do Colleges and Universities Increase Second Chances: Subprime Mortgage Their Region’s Human Capital? Modification and Re-Default Jaison R. Abel and Richard Deitz Andrew Haughwout, Ebiere Okah, and Joseph Tracy Abel and Deitz investigate whether the degree-production and research-and-devel - Mortgage modifications have become an opment (R&D) activities of colleges and important component of public interven - universities are related to the amount and tions designed to reduce foreclosures. types of human capital present in the met - Haughwout, Okah, and Tracy examine how ropolitan areas where the institutions are the structure of a mortgage modification located. They find that degree production affects the likelihood of the modified mort - has only a small positive relationship with gage re-defaulting over the next year. Using local stocks of human capital, suggesting data on subprime modifications that pre - that migration plays an important role in cede the government’s Home Affordable the geographic distribution of human capi - Modification Program, the authors focus on

Research and Statistics Group Research Update I Number 4, 2009

those modifications in which the borrower eral equilibrium model. After forming pri - was seriously delinquent and the monthly ors about the parameters of the model and payment was reduced as part of the modifi - the relevant shock, Denes and Eggertsson cation. The data indicate that the re-default use the model to exactly match only one rate declines with the magnitude of the data point: the trough of the Great reduction in the monthly payment, but also Depression, that is, an output collapse of that the re-default rate declines relatively 30 percent, deflation of 10 percent, and a more when the payment reduction is zero short-term nominal interest rate. achieved through principal forgiveness as Because the authors form their priors as opposed to lower interest rates. distributions, their key economic infer - ences—the multipliers of tax and spending— are well-defined probability distributions BANKING AND FINANCE derived from the posterior of the model. No. 402, November 2009 While the Bayesian methods used are stan - What Fiscal Policy Is Effective dard, the application is slightly unusual. 8 at Zero Interest Rates? Denes and Eggertsson conjecture that this Gauti B. Eggertsson methodology can be applied in several dif - ferent settings with severe data limitations Tax cuts can deepen a recession if the and where more informal calibrations have short-term nominal interest rate is zero, been the norm. Applying their simple esti - according to a standard New Keynesian mation method to the American Recovery business cycle model. An example of a and Reinvestment Act, they find that the contractionary tax cut is a reduction in Act increased output by 3.6 percent in taxes on wages. This tax cut deepens a 2009 and 2010. recession because it increases deflationary pressures. Another example is a cut in capi- No. 406, November 2009 tal taxes. This tax cut deepens a recession Broker-Dealer Risk Appetite and because it encourages people to save rather Commodity Returns than spend at a time when more spending Erkko Etula is needed. Fiscal policies aimed directly at This paper shows that the risk-bearing stimulating aggregate demand work better. capacity of securities brokers and dealers is These policies include: 1) a temporary a strong determinant of risk premia and increase in government spending and the volatility of returns in commodity mar - 2) tax cuts aimed directly at stimulating kets. Etula measures risk-bearing capacity aggregate demand rather than aggregate as the fraction of broker-dealer financial supply, such as an investment tax credit or assets relative to the total financial assets of a cut in sales taxes. The results are specific broker-dealers and households. This vari - to an environment in which the interest able has particularly strong power to fore - rate is close to zero, as observed in large cast energy returns, both in sample and out parts of the world today. of sample: It forecasts approximately 30 per - cent of the variation in quarterly crude oil No. 403, November 2009 returns. These findings are rationalized in a A Bayesian Approach to Estimating Tax simple asset-pricing model where the eco - and Spending Multipliers nomic role of broker-dealers is to provide Matthew Denes and Gauti B. Eggertsson insurance against commodity price fluctua - This paper outlines a simple Bayesian tions. The author estimates cross-sectional methodology for estimating tax and spend - prices of risk using an arbitrage-free ing multipliers in a dynamic stochastic gen - asset-pricing approach and shows that

Federal Reserve Bank of New York www.newyorkfed.org/research

broker-dealer risk-bearing capacity fore - a market transaction, the CAP securities casts commodity returns because of its carry a net value of approximately 30 per - association with the price of risk. cent of the capital invested for a bank par - ticipating to the maximum extent allowed No. 409, November 2009 under the program’s terms. Net value is Macroprudential Supervision of Financial also found to vary widely across banks. The Institutions: Lessons from the SCAP results suggest that the authors’ valuation Beverly Hirtle, Til Schuermann, aligns with shareholder perceptions of the pro - and Kevin Stiroh gram’s value. A fundamental conclusion drawn from the recent financial crisis is that the supervi - No. 414, December 2009 sion and regulation of financial firms in The Microstructure of the TIPS Market isolation—a purely microprudential per - Michael J. Fleming and Neel Krishnan spective—are not sufficient to maintain Fleming and Krishnan characterize the financial stability. Rather, a macropruden - microstructure of the market for Treasury tial perspective, which evaluates and inflation-protected securities (TIPS) using 9 responds to the financial system as a novel tick data from the interdealer mar - whole, seems necessary, and the ongoing ket. The authors find a marked difference discussions of regulatory reform in the in trading activity between on-the-run and United States underscore this view. The off-the-run securities, as in the nominal recently concluded Supervisory Capital Treasury securities market. They find little Assessment Program (SCAP), better known difference in bid-ask spreads or quoted as the bank “stress test,” is one example of depth between on-the-run and off-the-run how the macro- and microprudential per - securities, in contrast to the nominal mar - spectives can be joined to create a stronger ket, but they do find a sharp difference in supervisory framework that addresses a the incidence of posted quotes. Intraday wider range of supervisory objectives. This activity differs strikingly from the nominal paper reviews the key features of the SCAP market, with activity peaking in the mid- and discusses how they can be leveraged to to-late morning. Announcement effects improve bank supervision in the future. also differ from the nominal market, with auction results and consumer price index No. 413, December 2009 announcements eliciting particularly sharp Valuing the Treasury’s Capital increases in trading activity. Assistance Program Paul Glasserman and Zhenyu Wang No. 416, December 2009 This study develops a contingent claims The Mechanics of a Graceful Exit: framework to estimate market values of the Interest on Reserves and Segmentation Treasury’s Capital Assistance Program in the Federal Funds Market (CAP). The interaction between the com - Morten L. Bech and Elizabeth Klee peting options held by the buyer and issuer To combat the financial crisis that intensi - of these securities creates a game between fied in fall 2008, the Federal Reserve them; the authors’ approach captures this injected a substantial amount of liquidity strategic element of the joint valuation into the banking system. The resulting problem and clarifies the incentives it cre - increase in reserve balances exerted down - ates. Glasserman and Wang apply their ward price pressure in the federal funds method to eighteen bank holding compa - market, and the effective federal funds rate nies that participated in the Supervisory began to deviate from the target rate set by Capital Assessment Program (the bank the Federal Open Market Committee. In “stress test”) launched with the CAP. On response, the Federal Reserve revised its average, they estimate that compared with operational framework for implementing

Research and Statistics Group Research Update I Number 4, 2009

monetary policy and began to pay interest No. 415, December 2009 on reserve balances in an attempt to pro - Measuring Consumer Uncertainty vide a floor for the federal funds rate. about Future Inflation Nevertheless, following the policy change, Wandi Bruine de Bruin, Charles F. Manski, the effective federal funds rate remained Giorgio Topa, and Wilbert van der Klaauw below not only the target but also the rate Current survey measures of consumer infla - paid on reserve balances. This study devel - tion expectations contain no information ops a model to explain this phenomenon about an individual’s uncertainty about and uses federal funds market data to evalu- future inflation. This information is impor - ate it empirically. The authors show how tant not only for forecasting inflation and successful the Federal Reserve may be in other macroeconomic outcomes, but also raising the federal funds rate even in an for assessing a central bank’s credibility and environment with substantial reserve balances. effectiveness of communication. In November 2007, the authors of this paper 10 QUANTITATIVE METHODS began administering web-based surveys to participants in RAND’s American Life No. 412, December 2009 Panel. In addition to providing point pre - Dynamic Hierarchical Factor Models dictions, respondents were asked to provide Emanuel Moench, Serena Ng, subjective probability distributions of future and Simon Potter inflation outcomes. The authors find that This paper uses multi-level factor models to their measures of individual forecast densi - characterize within- and between-block ties and uncertainty are internally consis - variations as well as idiosyncratic noise in tent and reliable. Those who are more large dynamic panels. Block-level shocks uncertain about year-ahead price inflation are distinguished from genuinely common are also more uncertain about longer term shocks, and the estimated block-level fac - price inflation and future wage changes. tors are easy to interpret. The framework Participants expressing higher uncertainty achieves dimension reduction and yet in their density forecasts make larger revi - explicitly allows for heterogeneity between sions to their point forecasts over time. blocks. The model is estimated using a Finally, while the authors’ measure of Markov-chain Monte Carlo algorithm that aggregate consumer uncertainty is correlated takes into account the hierarchical struc - with the dispersion in point forecasts ture of the factors. The authors organize a among individuals, the two measures are panel of 447 series into blocks according to distinct concepts—both relevant to the I the timing of data releases and use a four- analysis of inflation expectations. level model to study the dynamics of real activity at both the block and aggregate lev - els. While the effect of the economic down - turn of 2007-09 is pervasive, growth cycles are synchronized only loosely across blocks. The state of the leading and the lagging sectors, as well as that of the overall economy, is monitored in a coherent framework.

Federal Reserve Bank of New York www.newyorkfed.org/research

Recently Published Nicola Cetorelli. 2009. “Banking and Real João Santos. 2009. “Is the Secondary Economic Activity.” In Allen Berger, Market for Loans Beneficial to Firms?” Phillip Molineaux, and John Wilson, eds., with Peter Nigro. Quarterly Review of Oxford Handbook of Banking . Oxford Economics and Finance 49, no. 4 University Press. (November): 1410-28.

Linda Goldberg. 2009. “Macroeconomic Asani Sarkar. 2009 . “Liquidity Risk, Credit Interdependence and the International Risk, and the Federal Reserve’s Responses Role of the Dollar,” with Cédric Tille. to the Crisis.” Financial Markets and Journal of Monetary Economics 56, no. 7 Portfolio Management 23, no. 4: 335-48. (October): 990-1003. Til Schuermann. 2009. “Forecasting Emanuel Moench. 2009. “Sectoral Price Economic and Financial Variables with Data and Models of Price Setting,” with Global VARs,” with M. Hashem Pesaran 11 Bartosz Ma kowiak and Mirko Wiederholt. and L. Vanessa Smith. International Journal Journal of Monetary Economics 56, of Forecasting 25 , no. 4 (October-December): October, Suppl. 1: S78-S99. 642-75. I

Papers Presented by Economists in the Research and Statistics Group

“The Mechanics of a Graceful Exit: Interest “Sectoral Price Facts in a Sticky-Price Model,” on Reserves and Segmentation in the Carlos Carvalho. Sveriges Riksbank seminar, Federal Funds Market,” Morten Bech. Stockholm, Sweden, October 6. With Jae European Central Bank Workshop Won Lee. Also presented at a Norges Bank “Challenges to Monetary Policy seminar, Oslo, Norway, October 19, and a Implementation beyond the Financial CREI (Centre de Recerca en Economia Market Turbulence,” Frankfurt, Germany, Internacional) seminar, Barcelona, Spain, December 1. With Elizabeth Klee. October 29.

“Estimating the Cross-Sectional “Do Charter Schools Crowd Out Private Distribution of Price Stickiness from Enrollment? Evidence from Michigan,” Aggregate Data,” Carlos Carvalho. Rajashri Chakrabarti. Association for Understanding Price Dynamics: Recent Public Policy Analysis and Management Advances , a conference cosponsored by seminar, Washington, D.C., November 5. Banque de France and DGCCRF (General With Joydeep Roy. Also presented at a Directorate for Competition, Consumer University of Connecticut seminar, Affairs, and Fraud Control), Paris, France, Hartford, Connecticut, December 11. October 15. With Niels Dam. “Conventional and Unconventional “Price Setting in a Variable Macroeconomic Monetary Policy,” Vasco Cúrdia. Sveriges Environment: Evidence from Brazilian Riksbank seminar, Stockholm, Sweden, CPI,” Carlos Carvalho. Danmarks November 7. With Michael Woodford. Also Nationalbank seminar, Copenhagen, presented at a Rutgers University seminar, Denmark, October 1. With Rebecca Barros, New Brunswick, New Jersey, December 1. Marco Bonomo, and Silvia Matos.

Research and Statistics Group Research Update I Number 4, 2009

“Do Colleges and Universities Increase “What Can We Learn from Privately Held Their Region’s Human Capital?” Richard Firms about Executive Compensation?” Deitz. Fifty-sixth North American Meetings Hamid Mehran. Fourth Bank of Italy–CEPR of the Regional Science Association Conference on Money, Banking, and Finance, International, San Francisco, California, Rome, Italy, October 1. With Rebel Cole. November 21. With Jaison Abel. “Are Comovements Excessive?” Asani “Broker-Dealer Risk Appetite and Sarkar. Rotterdam School of Management Commodity Returns,” Erkko Etula. seminar, Rotterdam, the Netherlands, Universidad Carlos III seminar, Madrid, December 8. With Maria Kasch. Spain, November 16. “Capital Constraints, Counterparty Risk, “Repo Market Effects of the Term and Deviations from CIP,” Asani Sarkar. Securities Lending Facility,” Michael University of Tilburg seminar, Tilburg, the Fleming. Sir John Cass Business School Netherlands, December 7. With Niall Coffey 12 seminar, London, England, October 5. With and Warren Hrung. Warren Hrung and Frank Keane. Also pre - sented at the Central Bank and Financial “Federal Reserve Liquidity Tools,” Asani Services Authority of Ireland, Dublin, Sarkar. World Research Group Quant Ireland, October 6. Trading Forum, New York City, October 22.

“Social Security, Benefit Claiming, and “Bank Liquidity, Interbank Markets, and Labor Force Participation: A Quantitative Monetary Policy,” David Skeie. Latin General Equilibrium Approach,” Sagiri American Meeting of the Econometric Kitao. Stony Brook University Economics Society, Buenos Aires, Argentina, October 1. With Xavier Freixas and Antoine Martin. Department seminar, Stony Bro.ok, New York, October 20. With Selahattin Imrohoro glu. “The Empirical Content of Models with “Precautionary Reserves and the Interbank Multiple Equilibria in Economies with Market,” James McAndrews and David Social Interactions,” Giorgio Topa. CIRA NO– Skeie. European Central Bank Workshop CIREQ Conference on the Econometrics of “Challenges to Monetary Policy Interactions, Montreal, Quebec, Canada, Implementation,” Frankfurt, Germany, October 22. With Alberto Bisin and December 1. With Adam Ashcraft. Andrea Moro.

“Compensation and Leverage,” Hamid “MBS Ratings and the Mortgage Credit Boom,” Mehran. Federal Deposit Insurance James Vickery. Fifth New York Fed–NYU Stern Corporation workshop, Washington, D.C., Conference on Financial Intermediation, December 16. New York City, November 13. With Adam Ashcraft and Paul Goldsmith-Pinkham. “Compensation in the Banking Industry,” Hamid Mehran. Bank of Italy seminar, “How Do College Students Form Rome, Italy, September 30. Exp ectations?” Basit Zafar. New York University seminar, New York City, November 30. I

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Research and Statistics Group CURRENT ISSUES IN ECONOMICS AND FINANC E, VO L. 15 Publications and Papers: October-December 2009 No. 6, October 2009 The Global Financial Crisis and Publications are available at Offshore Dollar Markets www.newyorkfed.org/research/ Niall Coffey, Warren B. Hrung, publication_annuals/index.html . Hoai-Luu Nguyen, and Asani Sarkar No. 7, November 2009 ECONOMIC POLICY REVIEW Do Alternative Measures of GDP Affect Its Interpretation? Forthcoming Bart Hobijn and Charles Steindel Special Issue: Central Bank Liquidity Tools No. 8, December 2009 and Perspectives on Regulatory Reform Why Are Banks Holding So Many Excess Reserves? 13 Central Bank Liquidity Tools Todd Keister and James J. McAndrews Opening Remarks Patricia C. Mosser STAFF REPORTS Conference Overview and Summary of Proceedings No. 396, October 2009 Matthew Denes, Daniel Greenwald, Prices and Quantities in the Monetary Nicholas Klagge, Ging Cee Ng, Policy Transmission Mechanism Jeffrey Shrader, Michael Sockin, Tobias Adrian and Hyun Song Shin and John Sporn No. 397, October 2009 Central Bank Tools and Monetary Tightening Cycles and Liquidity Shortages the Predictability of Economic Activity Stephen G. Cecchetti and Piti Disyatat Arturo Estrella and Tobias Adrian Provision of Liquidity through the No. 398, October 2009 Primary Credit Facility during the Financial Intermediaries and Financial Crisis: A Structural Analysis Monetary Economics Erhan Artuç and Selva Demiralp Tobias Adrian and Hyun Song Shin No. 399, October 2009 Perspectives on Regulatory Reform Labor Supply Heterogeneity and Informational Easing: Improving Macroeconomic Comovement Credit Conditions through Stefano Eusepi and Bruce Preston the Release of Information No. 400, October 2009 Matthew Pritsker The Determinants of International Systemic Risk and Deposit Flows of U.S. Currency Insurance Premiums Rebecca Hellerstein and William Ryan Viral V. Acharya, João A. C. Santos, No. 401, October 2009 and Tanju Yorulmazer Do Colleges and Universities Increase Their Region’s Human Capital? Jaison R. Abel and Richard Deitz

Research and Statistics Group Research Update I Number 4, 2009

No. 402, November 2009 No. 412, December 2009 What Fiscal Policy Is Effective Dynamic Hierarchical Factor Models at Zero Interest Rates? Emanuel Moench, Serena Ng, Gauti B. Eggertsson and Simon Potter No. 403, November 2009 No. 413, December 2009 A Bayesian Approach to Estimating Valuing the Treasury’s Capital Tax and Spending Multipliers Assistance Program Matthew Denes and Gauti B. Eggertsson Paul Glasserman and Zhenyu Wang No. 404, November 2009 No. 414, December 2009 Conventional and Unconventional The Microstructure of the TIPS Monetary Policy Market Vasco Cúrdia and Michael Woodford Michael J. Fleming and Neel Krishnan No. 405, November 2009 No. 415, December 2009 Micro, Macro, and Strategic Forces Measuring Consumer Uncertainty 14 in International Trade Invoicing about Future Inflation Linda S. Goldberg and Cédric Tille Wandi Bruine de Bruin, Charles F. Manski, Giorgio Topa, and Wilbert van der Klaauw No. 406, November 2009 Broker-Dealer Risk Appetite and No. 416, December 2009 Commodity Returns The Mechanics of a Graceful Exit: Erkko Etula Interest on Reserves and Segmentation No. 407, November 2009 in the Federal Funds Market Morten L. Bech and Elizabeth Klee How Rigid Are Producer Prices? Pinelopi Koujianou Goldberg No. 417, December 2009 and Rebecca Hellerstein Second Chances: Subprime Mortgage No. 408, November 2009 Modification and Re-Default Implications of the Financial Crisis Andrew Haughwout, Ebiere Okah, and Joseph Tracy for Potential Growth: Past, Present, and Future No. 418, December 2009 Charles Steindel The Homeownership Gap Andrew Haughwout, Richard Peach, No. 409, November 2009 and Joseph Tracy Macroprudential Supervision of Financial Institutions: Lessons from No. 419, December 2009 the SCAP Estimating the Cross-Sectional Beverly Hirtle, Til Schuermann, Distribution of Price Stickiness and Kevin Stiroh from Aggregate Data Carlos Carvalho and Niels Arne Dam No. 410, December 2009 Real-Time Search in the Laboratory No. 420, December 2009 and the Market Real-Time Underlying Inflation Meta Brown, Christopher J. Flinn, Gauges for Monetary Policymakers and Andrew Schotter Marlene Amstad and Simon Potter No. 411, December 2009 Investment Shocks and the Relative Price of Investment Alejandro Justiniano, Giorgio E. Primiceri, and Andrea Tambalotti

The views expressed in the publications and papers summarized in Research Update are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.

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