Bank of New York Number 3 2008 ResearchUpdate Research and Statistics Group www.newyorkfed.org/research

John Leahy Joins Research Group’s Resident Scholars Program ohn Leahy has become a resident The Research Group established its scholar of the Research Group Program for Resident Scholars in 2004 Jthrough the end of 2008. He joins to attract to the New York Fed, for a stay Eric Ghysels, resident scholar for of at least six months, outstanding 2008-09. researchers with an international reputa- Professor Leahy is a professor of eco- tion. The scholars are selected from the nomics at New York University. He has top academic and policy institutions in also held teaching positions at Boston areas related to the Bank’s broad policy University and Harvard University and interests. Resident scholars pursue their served as a visiting scholar at the Federal own research agendas while participat- Reserve Banks of Kansas City, New York, ing fully in the Group’s activities. They and Philadelphia. Professor Leahy is well- work closely with the director of known for his research on macroeconomics, research, contribute to policymaking economic theory, and behavioral economics. discussions, and provide intellectual His work has appeared in the American leadership by advising and collaborating Economic Review, the Journal of Political with the Group’s economists. Economy, the Quarterly Journal of Economics, and the Review of Economics and Statistics. Also in this issue… He is an associate editor of the American Economic Economic Policy Review examines payment activities Review and the Review of from eight diverse perspectives ...... 2 Economics and Statistics. New lending facility is designed to improve liquidity In addition, Professor Leahy conditions in the interbank funding markets...... 4 is a research associate at Other new publications ...... 5 the National Bureau of Website features most downloaded publications ...... 6 Economic Research and Staff Reports: New titles ...... 7 was a research fellow of the Papers recently published by Research Group Alfred P. Sloan Foundation. economists...... 12 Papers presented at conferences ...... 13 Publications and papers: July-September...... 15 ResearchVolume 9, Update Number ■ 4,Number 2006 3, 2008

Previous resident scholars are Mark Manhattan Bank Foundation Professor Gertler, the Henry and Lucy Moses of Financial Institutions at Columbia Professor of Economics at New York Business School; and Jiang Wang, the University; Nobuhiro Kiyotaki, professor Mizuho Financial Group Professor at of economics at Princeton University; MIT’s Sloan School of Management. ■ Suresh M. Sundaresan, the Chase

Economic Policy Review Examines Economics of Payments from Eight Diverse Perspectives s sthe the global global economy economy continues continues to to of trends in large-value payments, and 2 grow,grow, paymentspayments havehave increasedincreased inin risk management in payments systems. A importance as a component of The variety of approaches and techniques financial services—and their contribution they employ illustrate the diversity of to the economy is likely to rise as well. interests that economists are bringing to This rising trend is especially relevant for the study of payment activities. banks and central banks as providers of The theoretical theme is examined in payment services. Bank customers often three articles. Two—“Intraday Liquidity rely on credit provided by their institu- Management: A Tale of Games Banks tions to complete payments, while banks Play,” by Morten L. Bech, and “An themselves depend on very short-term Economic Analysis of Liquidity-Saving credit supplied by central banks to make Mechanisms,” by Antoine Martin and payments. Managing payments is there- James McAndrews—emphasize large- fore part of a larger risk management value payments systems. The authors process in the financial sector because explore banks’ strategic incentives to financial institutions providing credit submit payments on time in different must manage risk to prevent excessive economic environments. They consider exposure. how the incentives are affected by differ- These developments are transforming ent central bank policies, such as the the economics of payments into a rapidly terms under which intraday credit is growing area of research. In September provided. In the third article, “Divorcing 2008, the New York Fed published a spe- Money from ,” Todd cial issue of the Economic Policy Review Keister, Antoine Martin, and James (vol. 14, no. 2) to deepen interest in this McAndrews evaluate alternative models dynamic field as well as to spur further of monetary policy implementation. work on behavior in payments systems. This study also considers the relation- The eight studies collected center on ship between the demand for intraday three broad themes: theoretical models of balances to meet payment needs and money and payments, empirical analyses the reserve balances used by monetary

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

authorities to accomplish their policy the second, by Christopher Becher, objectives. Marco Galbiati, and Merxe Tudela, Morten L. Bech, Christine Preisig, and examines CHAPS, the major U.K. system. Kimmo Soramäki bring an empirical per- The differences in payment timing spective to developments in large-value between the two systems are found to payments over the past decade. Their be significant. contribution, “Global Trends in Large- The volume’s final two papers consider Value Payments,” points to ten major the theme of risk management, applying trends in the growth and evolution of the economic reasoning associated with payments, as well as three key drivers of risks in credit arrangements to the specific the trends: technological innovation, case of payments. “Understanding Risk structural changes in banking, and the Management in Emerging Retail evolution of central bank policies. The Payments,” by Michele Braun, James timing of large-value payments systems is McAndrews, William Roberds, and 3 considered by two additional empirical Richard Sullivan, emphasizes emerging studies—“Changes in the Timing retail systems while “An Economic Distribution of Fedwire Funds Transfers” Perspective on the Enforcement of Credit and “The Timing and Funding of CHAPS Arrangements: The Case of Daylight Sterling Payments.” Both articles com- Overdrafts in Fedwire,” by Antoine Martin plement Bech’s theoretical work by and David C. Mills, focuses on the risk explaining how different central bank associated with central bank intraday policies influence payment timing. The lending to banks. first, by Olivier Armantier, Jeffrey Arnold, The articles are available at and James McAndrews, focuses on www.newyorkfed.org/research/epr/ Fedwire, the Federal Reserve’s system; index.html.

Publications and Papers

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

Research and Statistics Group Research Update ■ Number 3, 2008

New Lending Facility Is Designed to Improve Liquidity Conditions in the Interbank Funding Markets n response to ongoing pressure on one month or longer rose dramatically term funding rates in the interbank while the volume of unsecured term I funding markets, in December 2007 (longer than overnight) funding contracted. the Federal Reserve began auctioning The persistence of high term rates kept funds directly to depository institutions. interest rates elevated on a range of By introducing the Term Facility instruments, such as home mortgages and (TAF), the Fed sought to improve liquidity corporate loans. Moreover, an increasing conditions in a key funding environment, dependence on overnight borrowing con- observe Olivier Armantier, Sandra Krieger, tributed to higher volatility in overnight and James McAndrews, authors of “The interest rates, subjecting banks to greater Federal Reserve’s Term Auction Facility” uncertainty about funding costs. Thus, 4 (Current Issues in Economics and Finance, the short-term money markets were not July 2008). operating efficiently. Their study explains that when the To inject more liquidity into the inter- interbank funding markets run smoothly, bank funding markets, in August 2007 primary dealers (banks and brokers that the Fed made several changes to its trade U.S. government and other securi- , a backstop source of ties with the New York Fed) distribute to liquidity used by banks mainly during banks reserves provided by the Federal market disruptions. However, the changes Reserve, facilitating generated little additional borrowing. As In December 2007, transactions in the strain on term funding rates persisted the Federal Reserve larger economy. Banks into the fall, the central bank devised in turn base their will- another way to provide liquidity to the introduced the ingness to lend to one markets. Term Auction Facility another on their credit- In December 2007, the Federal to auction funds worthiness and on their Reserve introduced the Term Auction directly to banks. own ability to access Facility to auction funds directly to banks. the funding markets. Sound institutions, note the authors, During crisis periods, however, a sudden can use the TAF to obtain longer term reduction in that willingness or ability funding on a collateralized basis through disrupts the markets and financial inter- periodic . The facility originates mediation more broadly. and distributes lending of fixed amounts Crisis conditions began to emerge in of funds in a fashion similar to the Fed’s the interbank funding markets in the late open market operations (through which summer of 2007, following deteriorating the aggregate level of balances avail- performance in much of the market for able in the banking system, and thus mortgage-backed securities. the rate, are affected). premiums on unsecured bank funding for At the same time, the TAF lends on a

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

collateralized basis by using the discount rates generally consistent with market window and its collateral management rates. These results lead the authors to operations. The facility differs from the conclude that the Term Auction Facility discount window, however, in its use of can be an important tool in mitigating a competitive auction format and a difficulties in the funding markets. market-determined interest rate. The article is available at Armantier, Krieger, and McAndrews www.newyorkfed.org/research/current_ describe the first ten TAF auctions con- issues/ci14-5.html. ducted between December 17, 2007, and April 21, 2008. The first eight Editor’s note: At the end of third- auctions attracted significant quarter 2008, the TAF remains an competition for funds. In addition, the important tool used by the Fed to number of participants has generally address the market turmoil. More been strong—suggesting that many banks information on the facility and results 5 are recognizing the usefulness of the for all auctions can be found at auctions, according to the study. The new www.federalreserve.gov/monetarypolicy facility has also been allocating funds at /taf.htm.

Other New Publications

■ Facts & Trends—a new Bank publication that presents key facts on issues of interest to governments, community advocates, institutions, and practitioners in the Federal Reserve’s Second District. The first set of articles in the series will have a shared focus on subprime mortgage conditions around the region. The articles will complement the dynamic maps of nonprime mortgage conditions currently available on the New York Fed’s website. The first issue—“A Look at New Jersey’s Subprime Mortgages in ”— traces patterns of regional variation in, and neighborhood concentration of, owner-occupied subprime mortgages in foreclosure. The article is available at www.newyorkfed.org/newsevents/news/regional_ outreach/2008/facts_trends.pdf; the maps can be found at www.newyorkfed.org/ mortgagemaps/.

Research and Statistics Group Research Update ■ Number 3, 2008

Website Features Most Downloaded Publications isitors to a newly created web The three most downloaded articles page can link to the top ten from our page on the SSRN site VResearch Group articles and (www.ssrn.com/link/FRB-New-York papers downloaded from the New York .html) were: Fed’s website as well as from the Bank’s ■ “Understanding the Securitization page on the Social Science Research of Subprime Mortgage Credit,” by Network site. Adam B. Ashcraft and Til Schuermann The web page is designed to showcase (Staff Report no. 318, March 2008) – the work of our economists that is most 2,155 downloads; in demand, to give you a sense of what others in the field are reading, and to ■ “The Consolidation of the Financial 6 share some publications of interest that Services Industry: Causes, Conse- you may have missed. In fact, articles that quences, and Implications for the remain among the favorites were often Future,” by Allen N. Berger, Rebecca published several years ago. S. Demsetz, and Philip E. Strahan In the third quarter, the three most (Staff Report no. 55, December 1998) downloaded articles from our site were: – 2,109 downloads; ■ “Understanding the Securitization ■ “An Empirical Analysis of Stock and of Subprime Mortgage Credit,” by Bond Market Liquidity,” by Tarun Adam B. Ashcraft and Til Schuermann Chordia, Asani Sarkar, and Avanidhar (Staff Report no. 318, March 2008) – Subrahmanyam (Staff Report no. 164, 4,177 downloads; March 2003) – 1,728 downloads; ■ “Divorcing Money from Monetary The page will be updated quarterly. Policy,” by Todd Keister, Antoine For the full lists of top-ten downloads, Martin, and James McAndrews visit www.newyorkfed.org/research/ (Economic Policy Review 14, no. 2, top_downloaded/index.html. September 2008) – 1,899 downloads; ■ “The Yield Curve as a Predictor of U.S. Recessions,” by Arturo Estrella and Frederic S. Mishkin (Current Issues in Economics and Finance 2, no. 7, June 1996) – 1,891 downloads.

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

New Titles in the Staff Reports constant the real value of debt at maturity, the equilibrium dynamics might be inde- Series terminate. However, determinacy can be The following new staff reports are restored by committing to targeting rules available at www.newyorkfed.org/ for either monetary or fiscal policy that research/staff_reports. include a concern for stabilization of the output gap. In solving the indeterminacy MACROECONOMICS problem, flexible inflation targeting appears AND GROWTH to be more robust than flexible debt target- ing to alternative parameter configurations No. 334, July 2008 and steady-state fiscal stances. If considera- Interpreting the Great Moderation: tions beyond stabilization call for a combi- Changes in the Volatility of Economic nation of strict inflation and debt targeting Activity at the Macro and Micro Levels rules, the indeterminacy result can be Steven J. Davis and James A. Kahn overturned if the fiscal authority commits to holding constant debt net of interest 7 Davis and Kahn review evidence on the rate spending. Great Moderation together with evidence on volatility trends at the micro level to No. 342, September 2008 develop a possible explanation for the Central Bank Transparency and decline in aggregate volatility since the Nonlinear Learning Dynamics 1980s and its consequences. Their expla- Stefano Eusepi nation stresses improved supply-chain management, particularly in the durable Central bank communication plays an goods sector and, less important, a shift in important role in shaping market partici- production and employment from goods to pants’ expectations. This paper studies a services. The study provides evidence that simple nonlinear model of monetary policy better inventory control made a substantial in which agents have incomplete informa- contribution to declines in firm-level and tion about the economic environment. aggregate volatility. Consistent with this It shows that agents’ learning and the view, if one looks past the turbulent 1970s dynamics of the economy are heavily and early 1980s, much of the moderation affected by central bank transparency reflects a decline in high-frequency (short- about its policy rule. A central bank that term) fluctuations. While these develop- does not communicate its rule can induce ments represent efficiency gains, they do “learning equilibria” in which the econo- not imply (nor is there evidence for) a my alternates between periods of deflation reduction in economic uncertainty faced by coupled with low output and periods of individuals and households. high economic activity with excessive inflation. More generally, initial beliefs No. 339, July 2008 that are arbitrarily close to the inflation The Advantage of Flexible Targeting Rules target equilibrium can result in complex Andrea Ferrero economic dynamics, resulting in welfare- This paper investigates the consequences of reducing fluctuations. On the contrary, debt stabilization for inflation targeting. If central bank communication of policy the monetary authority perfectly stabilizes rules helps stabilize expectations around inflation while the fiscal authority holds the inflation target equilibrium.

Research and Statistics Group Research Update ■ Number 3, 2008

No. 343, September 2008 been viewed as highly unlikely by investors Stabilizing Expectations under Monetary and mortgage issuers in the early part of and Fiscal Policy Coordination the decade. Stefano Eusepi and Bruce Preston No. 346, September 2008 This paper analyzes how the formation of Financial Intermediaries, Financial expectations constrains monetary and fiscal Stability, and Monetary Policy policy design. When agents are learning Tobias Adrian and Hyun Song Shin about the policy regime, there is greater need for policy coordination: the specific In a market-based financial system, bank- choice of monetary policy limits the set ing and capital market developments are of fiscal policies consistent with macro- inseparable. Adrian and Shin document economic stability—and simple Taylor-type evidence that balance sheets of market- rules frequently lead to expectations-driven based financial intermediaries provide a instability. In contrast, non-Ricardian fiscal window on the transmission of monetary policy through capital market conditions. 8 policies combined with an interest rate peg promote stability. Resolving uncertainty Short-term interest rates are determinants about the prevailing monetary policy of the cost of leverage and are found to regime improves stabilization policy, be important in influencing the size of enlarging the menu of policy options con- financial intermediary balance sheets. sistent with stability. However, there are However, except for periods of crises, higher balance-sheet growth tends to be limits to the benefits of communicating the followed by lower interest rates, and slower monetary policy regime: the more heavily balance-sheet growth is followed by higher indebted the economy, the greater the like- interest rates. This suggests that considera- lihood of expectations-driven instability. tion might be given to a monetary policy No. 345, September 2008 that anticipates the potential disorderly What Drives Housing Prices? unwinding of leverage. In this sense, James A. Kahn monetary policy and financial stability policies are closely linked. Kahn develops a growth model with land, housing services, and other goods that is capable of explaining a substantial portion INTERNATIONAL of the movements in housing prices over the past forty years. His paper introduces a No. 333, July 2008 Markov regime-switching specification for Banking Globalization, Monetary productivity growth in the nonhousing sec- Transmission, and the Lending Channel tor and uses micro data to calibrate a key Nicola Cetorelli and Linda S. Goldberg cross-elasticity parameter that governs the Using quarterly information from all U.S. relationship between productivity growth banks filing call reports between 1980 and and home price appreciation. Combined 2005, Cetorelli and Goldberg find evidence with a realistic model of learning about the of a lending channel for monetary policy in productivity process, the model is able to large banks, but only in those banks that capture the medium- and low-frequency serve the domestic market and have no fluctuations of both price and quantity international operations. The authors show from the residential sector. The model sug- that the large banks that operate globally gests that the current downturn in the rely on internal capital markets with their housing sector was triggered by a produc- foreign affiliates to help smooth domestic tivity slowdown that may have begun in liquidity shocks. They also show that the 2004, an event that could reasonably have existence of such internal capital markets

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

contributes to an international propagation discussing their correlates, they examine of domestic liquidity shocks to lending by two primary explanations: changes in affiliated banks abroad. While these results underwriting standards that took place over indicate a substantially more active lending this period and changes in the economic channel than is documented in Kashyap environment. The authors find that while and Stein (2000), they also imply that the credit standards were an important factor lending channel within the is behind the rising probability of an early declining in strength as banking becomes default, changes in the economy after more globalized. 2004—especially a sharp reversal in house price appreciation—were the more critical MICROECONOMICS factor. They also find that despite their rich set of covariates, much of the increase No. 332, July 2008 remains unexplained, even in retrospect. Human Capital and Economic Activity This finding helps explain why credit markets seemed surprised by the sharp in Urban America 9 Jaison R. Abel and Todd M. Gabe increase in early defaults in the 2006 and 2007 nonprime vintages. This paper examines the relationship between human capital and economic No. 344, September 2008 activity in U.S. metropolitan areas, extend- Have Amenities Become Relatively ing the existing literature in two important More Important than Firm Productivity ways. First, the authors utilize new data Advantages in Metropolitan Areas? on metropolitan area GDP to measure Richard Deitz and Jaison R. Abel economic activity. Using educational attain- ment as an indicator of human capital, Deitz and Abel analyze patterns of com- they find that a one-percentage-point pensating differentials to determine increase in the proportion of residents whether a region’s bundle of site character- with a college degree is associated with a istics has a greater net effect on household 2.3 percent increase in metropolitan area location decisions relative to firm location GDP per capita. Second, Abel and Gabe decisions in U.S. metropolitan areas over move beyond the conventional proxy for time. The authors estimate skill-adjusted human capital—educational attainment—to wages and attribute-adjusted rents for develop new measures that reflect the types 238 metropolitan areas in 1990 and 2000. of knowledge within U.S. metropolitan They classify each metropolitan area based areas. Their results show that knowledge on whether amenities or firm productivity associated with the provision of producer advantages dominate, and analyze the services and information technology are extent to which these classifications change particularly important determinants of eco- between 1990 and 2000. Deitz and Abel nomic vitality in U.S. metropolitan areas. then decompose compensating differentials into amenity and firm productivity advan- No. 341, August 2008 tage components and examine how these Juvenile Delinquent Mortgages: components change. Empirical results Bad Credit or Bad Economy? suggest that while the relative importance Andrew Haughwout, Richard Peach, of amenities appears to have increased and Joseph Tracy slightly between 1990 and 2000, firm Haughwout, Peach, and Tracy study early productivity advantages continued to domi- defaults among nonprime mortgages from nate amenities in the vast majority of the 2001 to 2007 vintages. After document- metropolitan areas during this decade. ing a dramatic rise in such defaults and

Research and Statistics Group Research Update ■ Number 3, 2008

No. 347, September 2008 No. 336, July 2008 ESOP Fables: The Impact of Employee A Study of Competing Designs for Stock Ownership Plans on Labor Disputes a Liquidity-Saving Mechanism Peter Cramton, Hamid Mehran, Antoine Martin and James McAndrews and Joseph Tracy Martin and McAndrews study two designs Cramton, Mehran, and Tracy examine the for a liquidity-saving mechanism (LSM), implications of employee stock ownership a queuing arrangement used as part of an plans (ESOPs) for collective bargaining or, interbank settlement system. They consider more generally, for cross ownership. They an environment in which banks must extend the signaling model of Cramton decide to send, queue, or delay their and Tracy (1992) to allow partial owner- payments after observing a noisy signal ship by the union, and they demonstrate of a liquidity shock. With one design— that ESOPs create incentives for unions a balance-reactive LSM—banks can set a to become weaker bargainers. The model balance threshold below which payments 10 predicts that ESOPs will lead to a reduc- are not released from the queue. Banks tion in strike incidence and in the fraction can choose their threshold in such a way of labor disputes that involve a strike. U.S. that the release of a payment from the bargaining data from 1970 to 1995 suggest queue is conditional on the liquidity shock. that ESOPs do increase the efficiency of With the second design—a receipt-reactive labor negotiations by shifting the composi- LSM—a payment is released from the tion of disputes away from costly strikes. queue if an offsetting payment is received, Consistent with improved bargaining regardless of the liquidity shock. The efficiency, the authors find that the authors find that these two designs have announcement of a union ESOP leads to opposite effects on different types of pay- a 50 percent larger stock market reaction ments. They also show that parameter when compared with the announcement values will determine which design provides of a nonunion ESOP. higher welfare.

BANKING AND FINANCE No. 337, July 2008 Should There Be Intraday Money Markets? No. 335, July 2008 Antoine Martin and James McAndrews The Effect of the Term Auction Facility This paper considers the case for an intra- on the London Inter-Bank Offered Rate day market for reserves. Martin and James McAndrews, Asani Sarkar, McAndrews discuss the separate roles of and Zhenyu Wang intraday and overnight reserves and argue This paper examines the effects of the that an intraday market could be organized Federal Reserve’s Term Auction Facility in the same way as the overnight market. (TAF) on the London Inter-Bank Offered The authors present arguments for and Rate (LIBOR). The particular question against a market for intraday reserves when investigated is whether the announcements the marginal cost of overnight reserves is and operations of the TAF are associated positive. They also consider how reserves with downward shifts of the LIBOR; such should be supplied when the cost of an association would provide one indica- overnight reserves is zero. In that case, the tion of the TAF’s effectiveness in mitigating distinction between overnight and intraday liquidity problems in the interbank funding reserves becomes blurred, raising an market. The study’s empirical results sug- important question: What is the role of the gest that the TAF has helped to ease overnight market? strains in this market.

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

No. 338, July 2008 preted as dynamic Fama-MacBeth regres- Financial Intermediary Leverage sions. The authors derive cross-equation and Value-at-Risk restrictions for bond yields, which they do Tobias Adrian and Hyun Song Shin not impose in the estimation, but instead Adrian and Shin study a contracting model test. They can easily estimate specifications for the determination of leverage and bal- with large numbers of pricing factors, ance sheet size for financial intermediaries including volatility factors. The authors that fund their activities through collateral- uncover specifications that give rise to ized borrowing. The model gives rise to lower pricing errors than do commonly two features: First, leverage is procyclical advocated specifications, both in- and out- in the sense that leverage is high when the of-sample. Efficiency can be obtained by balance sheet is large. Second, leverage way of the generalized method of moments and balance sheet size are both determined estimator. by the riskiness of assets. For U.S. invest- No. 348, September 2008 ment banks, the authors find empirical CoVaR 11 support for both features of the model—that Tobias Adrian and Markus K. Brunnermeier is, leverage is procyclical, and both lever- age and balance sheet size are determined Adrian and Brunnermeier define CoVaR as by measured risks. In a system context, the value at risk (VaR) of financial institu- increased risk reduces the debt capacity of tions conditional on other institutions the financial system as a whole, giving rise being in distress. The increase of CoVaR to amplified de-leveraging by institutions relative to VaR measures spillover risk by way of the chain of repo transactions among institutions. The authors estimate in the financial system. CoVaR using quantile regressions and docu- ment significant CoVaR increases among No. 340, August 2008 financial institutions. They identify six risk Pricing the Term Structure factors that allow institutions to offload tail with Linear Regressions risk and show that such hedging reduces Tobias Adrian and Emanuel Moench the wedge between CoVaR and VaR. Adrian Adrian and Moench develop an affine term and Brunnermeier argue that financial structure model from a conditionally linear institutions should report CoVaR in addi- pricing kernel, without making distribu- tion to VaR, and they draw implications for tional assumptions about shocks. Assuming risk management, regulation, and systemic pricing factors to be observable, they risk. They define co-expected shortfall as a estimate the model by way of three-stage sum of CoVaRs. ■ ordinary least squares, which can be inter-

Research and Statistics Group Research Update ■ Number 3, 2008

Recently Published Paolo Pesenti. 2008. “Would Protectionism Defuse Global Imbalances and Spur Gauti Eggertsson. 2008. “Great Expectations Economic Activity? A Scenario Analysis,” and the End of the Depression.” American with Hamid Faruqee, Douglas Laxton, and Economic Review 98, no. 4 (September): Dirk Muir. Journal of Economic Dynamics 1476-1516. and Control 32, no. 8 (August): 2651-89.

Linda Goldberg. 2008. “Pass-Through of AyAyse, egülgül Sah,ahin.in. 2008. “Aggregate Impli- Exchange Rates to Consumption Prices: cations of Indivisible Labor, Incomplete What Has Changed and Why?” with José Markets, and Labor Market Frictions,” with Manuel Campa. In Takatoshi Ito and Per Krusell, Toshihiko Mukoyama, and Andrew K. Rose, eds., International Richard Rogerson. Journal of Monetary Financial Issues in the Pacific Rim: Global Economics 55, no. 5 (July): 961-79. Imbalances, Financial Liberalization, and Proceedings of Labor Markets, Exchange Rate Policy, 139-76. East Asia Macroeconomic Fluctuations, and 12 Seminar on Economics 17. NBER confer- Monetary Policy, Carnegie-Rochester ence volume. Chicago: University of Conference Series on Public Policy. Chicago Press. João Santos. 2008. “The Decision to First Andrew Haughwout, Richard Peach, and Enter the Public Bond Market: The Role Joseph Tracy. 2008. “Juvenile Delinquent of Firm Reputation, Funding Choices, Mortgages: Bad Credit or Bad Economy?” and Bank Relationships,” with Galina Hale. Journal of Urban Economics 64, no. 2 Journal of Banking and Finance 32, no. 9 (September): 246-57. (September): 1928-40.

Rebecca Hellerstein. 2008. “Who Bears Wilbert van der Klaauw. 2008. “Social the Cost of a Change in the Exchange Security and the Retirement and Savings Rate? Pass-Through Accounting for the Behavior of Low-Income Households,” Case of Beer.” Journal of International with Kenneth Wolpin. Journal of Economics 76, no. 1 (September): 14-32. Econometrics 145, no. 1-2 (July): 21-42. ■

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

Papers Presented by Economists in “Credit Frictions and Optimal Monetary Policy,” Vasco Cúrdia. Banque de France– the Research and Statistics Group CEPREMAP conference on DSGE Modeling and Monetary Policy, Paris, “Financial Intermediary Leverage France, September 11. and Value at Risk,” Tobias Adrian. Oesterreichische Nationalbank Research “Optimal Monetary Policy under Sudden Workshop on the Economics of Financial Stops,” Vasco Cúrdia. Society for Economic Stability, Vienna, Austria, July 8. With Dynamics annual meeting, Cambridge, Hyun Song Shin. Massachusetts, July 12. “Risk Spillovers of Financial Institutions,” “Expectations, Learning, and Business Tobias Adrian. NBER Summer Institute Cycle Fluctuations,” Stefano Eusepi. Workshop on Risks of Financial Institutions, Fourteenth International Conference on Cambridge, Massachusetts, July 10. With Computing in Economics and Finance, Markus K. Brunnermeier. Paris, France, June 28. With Bruce Preston. 13 “Pricing the Term Structure with Linear “When Does Determinacy Imply Expectational Regressions,” Tobias Adrian and Emanuel Stability?” Stefano Eusepi. Society for Moench. Stanford Institute for Theoretical Economic Dynamics annual meeting, Economics, Stanford, California, July 26. Cambridge, Massachusetts, July 10. With James Bullard. “Liquidity and Congestion,” Gara Afonso. Society for Economic Dynamics annual “Current Account Dynamics and Monetary meeting, Cambridge, Massachusetts, July 11. Policy,” Andrea Ferrero. Joint European Also presented at the Joint European Meeting of the European Economic Meeting of the European Economic Association and the Econometric Society, Association and the Econometric Society, Milan, Italy, August 29. With Mark Gertler Milan, Italy, August 30. and Lars E. O. Svensson. “Measuring the Impact of Securitization “Revisiting Useful Approaches to Data-Rich on Imputed Bank Output,” Adam Ashcraft Macroeconomic Forecasting,” Jan Groen. and Charles Steindel. NBER Summer Joint European Meeting of the European Institute Conference on Research in Income Economic Association and the Econometric and Wealth, Cambridge, Massachusetts, Society, Milan, Italy, August 31. With July 15. George Kapetanios. Also presented at the NBER–National Science Foundation Time “Aggregation and the PPP Puzzle in a Series Conference, Aarhus, Denmark, Sticky-Price Model,” Carlos Carvalho. September 13. NBER Summer Institute International Finance and Macroeconomics Workshop, “The Effect of Employee Stock Options on Cambridge, Massachusetts, July 7. With Bank Investment Choice, Borrowing, and Fernanda Nechio. Capital,” Hamid Mehran. Bank of Italy seminar, Rome, Italy, July 14. With Joshua “Heterogeneous Price-Setting Behavior Rosenberg. Also presented at the CESifo and Aggregate Dynamics: Some General Venice Summer Institute Workshop on Results,” Carlos Carvalho. Society for Executive Pay, Venice, Italy, July 16, and Economic Dynamics annual meeting, the symposium “Financial Intermediaries Cambridge, Massachusetts, July 12. With and Markets at the Cross-Roads: Economic Felipe Schwartzman. Also presented at the and Legal Perspectives on Financial Stability, Joint European Meeting of the European Liquidity, and Corporate Control,” cospon- Economic Association and the Econometric sored by the University of Amsterdam, Society, Milan, Italy, August 27. York University, the European Corporate

Research and Statistics Group Research Update ■ Number 3, 2008

Governance Institute, and the Review “Does Banks’ Corporate Control Benefit of Finance and held at the University of Firms? Evidence from U.S. Banks’ Control Amsterdam, Amsterdam, the Netherlands, over Firms’ Voting Rights,” João Santos. September 26. Financial Intermediation Research Society Finance Conference, Anchorage, Alaska, “What Do We Know about Executive July 6. With Kristin Wilson. Compensation at Privately Held Firms?” Hamid Mehran. CESifo Venice Summer “Financial Innovation and Corporate Default Institute Workshop on Executive Pay, Rates,” Asani Sarkar and Chenyang Wei. Venice, Italy, July 16. With Rebel Cole. Indian School of Business seminar, Hyderabad, India, August 10. With Samuel “Labor-Market Matching with Precautionary Maurer and Luu Nguyen. Also presented Savings and Aggregate Fluctuations,” at a Bank for International Settlements Ayse, gül Sah, in. Fourteenth International seminar, Basel, Switzerland, August 27. Conference on Computing in Economics and Finance, Paris, France, June 27. With “Trend Inflation and Inflation Persistence 14 Per Krusell and Toshihiko Mukoyama. in the New Keynesian Phillips Curve,” Argia Sbordone. Einaudi Institute for “Labor Supply in a Frictional Labor Economics and Finance seminar, Rome, Market,” AAyyseş, egülgül SahŞ, ahin.in. University of Italy, June 25. Southern California Marshall School of Business seminar, Los Angeles, California, “Subprime Credit Securitization,” September 26. With Per Krusell, Toshihiko Til Schuermann. RiskMetrics Group Mukoyama, and Richard Rogerson. conference, New York City, September 11. ■ “Revisiting the Welfare Effects of Eliminating Business Cycles: The Case of Short-Term and Long-Term Unemployment,” AyAyşse,egülgül SahŞ, ahin.in. Society for Economic Dynamics annual meeting, Cambridge, Massachusetts, July 12. With Per Krusell, Toshihiko Mukoyama, and Anthony A. Smith, Jr.

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

Research and Statistics Group Changes in the Timing Distribution of Fedwire Funds Transfers Publications and Papers: Olivier Armantier, Jeffrey Arnold, July-September 2008 and James McAndrews Publications are available at The Timing and Funding of CHAPS www.newyorkfed.org/research/ Sterling Payments Christopher Becher, Marco Galbiati, publication_annuals/index.html. and Merxe Tudela Understanding Risk Management ECONOMIC POLICY REVIEW, in Emerging Retail Payments VOL. 14 Michele Braun, James McAndrews, William Roberds, and Richard Sullivan No. 1, July 2008 Signal or Noise? Implications of the Term An Economic Perspective on the Premium for Recession Forecasting Enforcement of Credit Arrangements: Joshua V. Rosenberg and Samuel Maurer The Case of Daylight Overdrafts 15 in Fedwire Poverty in New York City, 1969-99: Antoine Martin and David C. Mills The Influence of Demographic Change, Income Growth, and Income Inequality CURRENT ISSUES IN ECONOMICS Mark K. Levitan and Susan S. Wieler AND FINANCE, VOL. 14 Why the U.S. Treasury Began Auctioning Treasury Bills in 1929 No. 5, July 2008 Kenneth D. Garbade The Federal Reserve’s Term Auction Facility Olivier Armantier, Sandra Krieger, No. 2, September 2008 and James McAndrews Special Issue: The Economics of Payments No. 6, August 2008 Introduction How Economic News Moves Markets James McAndrews Leonardo Bartolini, Linda Goldberg, and Adam Sacarny Intraday Liquidity Management: A Tale of Games Banks Play Morten L. Bech STAFF REPORTS An Economic Analysis of Liquidity- No. 332, July 2008 Saving Mechanisms Human Capital and Economic Activity Antoine Martin and James McAndrews in Urban America Jaison R. Abel and Todd M. Gabe Divorcing Money from Monetary Policy Todd Keister, Antoine Martin, No. 333, July 2008 and James McAndrews Banking Globalization, Monetary Transmission, and the Lending Channel Global Trends in Large-Value Payments Nicola Cetorelli and Linda S. Goldberg Morten L. Bech, Christine Preisig, and Kimmo Soramäki

Research and Statistics Group Research Update ■ Number 3, 2008

No. 334, July 2008 No. 342, September 2008 Interpreting the Great Moderation: Central Bank Transparency and Changes in the Volatility of Economic Nonlinear Learning Dynamics Activity at the Macro and Micro Levels Stefano Eusepi Steven J. Davis and James A. Kahn No. 343, September 2008 No. 335, July 2008 Stabilizing Expectations under Monetary The Effect of the Term Auction Facility and Fiscal Policy Coordination on the London Inter-Bank Offered Rate Stefano Eusepi and Bruce Preston James McAndrews, Asani Sarkar, No. 344, September 2008 and Zhenyu Wang Have Amenities Become Relatively No. 336, July 2008 More Important than Firm Productivity A Study of Competing Designs Advantages in Metropolitan Areas? for a Liquidity-Saving Mechanism Richard Deitz and Jaison R. Abel Antoine Martin and James McAndrews No. 345, September 2008 16 No. 337, July 2008 What Drives Housing Prices? Should There Be Intraday Money Markets? James A. Kahn Antoine Martin and James McAndrews No. 346, September 2008 No. 338, July 2008 Financial Intermediaries, Financial Financial Intermediary Leverage Stability, and Monetary Policy and Value-at-Risk Tobias Adrian and Hyun Song Shin Tobias Adrian and Hyun Song Shin No. 347, September 2008 No. 339, July 2008 ESOP Fables: The Impact of The Advantage of Flexible Targeting Rules Employee Stock Ownership Plans Andrea Ferrero on Labor Disputes No. 340, August 2008 Peter Cramton, Hamid Mehran, Pricing the Term Structure and Joseph Tracy with Linear Regressions No. 348, September 2008 Tobias Adrian and Emanuel Moench CoVaR No. 341, August 2008 Tobias Adrian and Markus K. Brunnermeier Juvenile Delinquent Mortgages: Bad Credit or Bad Economy? Andrew Haughwout, Richard Peach, and Joseph Tracy

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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