- 12 Oct 2017
- Working Paper Summaries
The Decline of Big-Bank Lending to Small Business: Dynamic Impacts on Local Credit and Labor Markets
Between 2008 and 2014, the Top 4 banks sharply decreased their lending to small business. This paper examines the lasting economic consequences of this contraction, finding that a credit supply shock from a subset of lenders can have surprisingly long-lived effects on real activity.
- 18 Apr 2017
- First Look
First Look at New Ideas, April 18
A traditional offline business learns from big data ... Interest rate conundrums ... De Beers looks beyond diamonds in the rough.
- 29 Nov 2016
- Working Paper Summaries
Fiscal Risk and the Portfolio of Government Programs
In modern economies, a large fraction of economy-wide risk is borne indirectly by taxpayers via the government. Governments have liabilities associated with retirement benefits, social insurance programs, and financial system backstops. Given the magnitude of these exposures, the set of risks the government chooses to bear and the way it manages those risks is of great importance. This study develops a new model for government cost-benefit analysis, and shows that distortionary taxation impacts the optimal scale and pricing of government programs. It also highlights the interaction between social and fiscal risk management motives, which frequently come into conflict.
- 08 Sep 2016
- Working Paper Summaries
A Model of Credit Market Sentiment
Recent empirical research in finance and economics has revived the idea that investor sentiment drives credit booms and busts. To explore the drivers of sentiment in credit markets, the authors model the two-way feedback between credit market sentiment and credit market outcomes. In their model the propagation of credit cycles is driven by the interplay between expectations and the refinancing nature of credit markets.
- 13 Jan 2016
- Working Paper Summaries
Forward Guidance in the Yield Curve: Short Rates versus Bond Supply
Since late 2008, central banks have been conducting monetary policy through two primary instruments: quantitative easing (QE), in which they buy long-term government bonds and other long-term securities, and “forward guidance,” in which they guide market expectations about the path of future short rates. This paper analyzes the effects of forward guidance on both short rates and QE. Results show that forward guidance on QE tends to impact longer maturities than forward guidance on short rates, even when expectations about bond purchases by the central bank concern a shorter horizon than expectations about future short rates.
- 26 Jan 2015
- Working Paper Summaries
The Rise and Fall of Demand for Securitizations
At the heart of the recent financial crisis were nontraditional securitizations, especially collateralized debt obligations and private-label mortgage-backed securities backed by nonprime loans. Demand for these securities helped feed the housing boom during the early and mid-2000s, while rapid declines in their prices during 2007 and 2008 generated large losses for financial intermediaries, ultimately imperiling their soundness and triggering a full-blown crisis. Little is known, however, about the underlying forces that drove investor demand for these securitizations. Using micro-data on insurers' and mutual funds' holdings of both traditional and nontraditional securitizations, this paper begins to shed light on the economic forces that drove the demand for securitizations before and during the crisis. Among the findings, variation across securitization types and investors is key to understanding the crisis. Beliefs appear to have been an important driver of mutual fund holdings of nontraditional securitizations. Results also underscore the importance of optimal liquidity management in the context of fire sales. Key concepts include: Inexperienced mutual fund managers invested significantly more in these products than experienced managers. Beliefs-shaped by past firsthand experiences-played an important role. Managers who had suffered through the market dislocations of 1998 invested substantially less in nontraditional securitizations than those who had not. For insurance companies, incentives appear to have played an important role, though the nature of the relevant incentive conflict seems to have varied across small and larger insurance firms. Closed for comment; 0 Comment(s) posted.
- 16 Oct 2014
- Working Paper Summaries
Government Debt Management at the Zero Lower Bound
At least since the 1980s, the three domains of United States monetary policy, fiscal and debt management policy, and the prudential regulation of financial intermediaries have been separate and distinct. However, with the onset of the financial crisis in 2007 and and subsequent easing of monetary policy, the lines between these domains have become blurred, and conventional monetary policies have lost their impact. This blurring of functions—and economists' observation that Federal Reserve and Treasury policies with regard to US government debt have been pushing in opposite directions—suggests the need to revisit the principles underlying government debt management policy. In this paper the authors quantify the extent to which the Fed and Treasury have been working at cross purposes. They also present a framework in which traditional debt management objectives can be considered in conjunction with managing aggregate demand and promoting financial stability. Overall, they argue for revised institutional arrangements to promote greater cooperation between the Treasury and the Federal Reserve in setting debt management policy. Key concepts include: Starting in 2008, US monetary policy and debt management dramatically changed course in response to the unfolding financial and economic crisis, pulling the government balance sheet in opposite directions. Debt management varies by time and has implications for aggregate demand. It therefore puts the Treasury into conflict with the Federal Reserve. Improved policy coordination could substantially reduce this conflict. Closed for comment; 0 Comment(s) posted.
- 22 Jul 2014
- Working Paper Summaries
Banks as Patient Fixed-Income Investors
What is the business of banking? Do banks primarily create value on the liability side of the balance sheet as suggested in theories of banking emphasizing liquidity creation? Does the essence of banking reside on the asset side, as in theories emphasizing banks' ability to monitor borrowers? Or does the special nature of banks derive from some synergy between their assets and liabilities? This paper argues that the specialness of traditional banks comes from combining stable money creation on the liability side with assets that have relatively safe long-run cash flows but possibly volatile market values and limited liquidity. To make this business model work, banks rely on deposit insurance, and bear the associated costs of capital regulation. Some preliminary evidence supports the authors' argument. For traditional banks there is a critical synergy between the asset and liability sides of the balance sheet. Key concepts include: One central role of intermediaries—and of banks in particular—is to act as a bridge between households who want to put their money in a safe place they do not need to watch, and securities markets where even assets with relatively low fundamental risk can have volatile market prices. The structure of financial intermediation may be shaped in important ways by the sorts of non-fundamental movements in asset prices-due to fire sales, slow-moving capital, and other frictions-that have been so extensively documented in asset-pricing scholarship. Closed for comment; 0 Comment(s) posted.
- 21 Oct 2013
- Research & Ideas
Missing the Wave in Ship Transport
Despite a repeating boom-bust cycle in the shipping industry, owners seem to make the same investment mistakes over time. Can other cyclical industries learn the lessons of the high seas? Research by Robin Greenwood and Samuel G. Hanson. Open for comment; 2 Comment(s) posted.
- 23 Aug 2013
- Working Paper Summaries
Waves in Ship Prices and Investment
Dry bulk shipping is a highly volatile and cyclical industry in which earnings, investment, and returns on capital appear in waves. In this paper, the authors develop a model of industry capacity dynamics in which industry participants have trouble forecasting demand accurately and fail to fully anticipate the effect that endogenous supply responses will have on earnings. The authors estimate the model using data on earnings, secondhand prices, and investment in the dry bulk shipping industry between 1976 and 2011. Findings show that returns to owning and operating a ship are predictable and closely related to industry-wide investment in capacity. High current ship earnings are associated with higher ship prices and higher industry investment, but predict low future returns on capital. Conversely, high levels of ship demolitions-a measure of industry disinvestment-forecast high returns. Key concepts include: Real-world economic agents may repeatedly underestimate the power of long-run competitive forces, particularly in markets-such as industries with long time-to-build delays-where feedback is delayed and learning is slow. The annual realized returns to owning a ship vary enormously over time, from a low of -76% between December 2007 and December 2008 to a high of +86% between June 1978 and June 1979. Cycles in investment, lease rates, and secondhand prices are connected to predictable variation in the returns to ship owners. Heavy investment during booms predictably depresses future earnings and the price of capital, leading prices to overshoot their rational-expectations levels. Closed for comment; 0 Comment(s) posted.
- 08 Aug 2012
- Working Paper Summaries
Monetary Policy and Long-Term Real Rates
Samuel G. Hanson and Jeremy C. Stein document that distant real forward rates react strongly to news about the future stance of monetary policy. These movements in forward rates appear to reflect changes in term premia, which largely accrue over the next year, as opposed to varying expectations about future real rates. The evidence suggests that one driving force behind time-varying term premia is the behavior of yield-oriented investors, who react to a cut in short rates by increasing their demand for longer-term bonds, thereby putting downward pressure on long-term rates. Key concepts include: The authors document the strong sensitivity of long-term real forward rates to monetary policy news, and argue that this relationship is likely to be causal. Movements in long-term real forward rates around monetary policy announcements appear reflect changes in term premia. Concretely, the authors find that a 100 basis-point (bp) increase in the 2-year nominal yield on a Federal Open Markets Committee (FOMC) announcement day is associated with a 42 bp increase in the 10-year forward overnight real rate, extracted from the yield curve for Treasury Inflation Protected Securities (TIPS). Closed for comment; 0 Comment(s) posted.
- 08 Dec 2011
- Working Paper Summaries
Are There Too Many Safe Securities? Securitization and the Incentives for Information Production
Markets for near-riskless securities have suffered numerous shutdowns in the last 40 years, with the recent financial crisis the most prominent example. This suggests that instability could be a general characteristic of such markets, not just a one-time problem associated with the subprime mortgage crisis. Professors Samuel G. Hanson and Adi Sunderam argue that the infrastructure and organization of professional investors are in part determined by the menu of securities offered by originators. Since robust infrastructure is a public good to originators, it may be underprovided in the private market equilibrium. The individually rational decisions of originators may lead to an infrastructure that is overly prone to disruptions in bad times. Policies regulating originator capital structure decisions may help create a more robust infrastructure. Key concepts include: Financial innovations that create near-riskless securities encourage investors to rationally choose to be uninformed. Learning from prior mistakes will not necessarily eliminate the instabilities associated with near-riskless securities. Capital structure regulation in good times can improve welfare. Specifically, it may be desirable to regulate the capital structures of securitization trusts by limiting the amount of AAA-rated debt that can be issued in good times. Informed investors are a robust source of capital capable of analyzing investment opportunities and financing positive NPV (net present value) projects even in bad times. Closed for comment; 0 Comment(s) posted.
Reflexivity in Credit Markets
Investors’ biases and market outcomes affect each other in a two-way feedback loop. This study develops a model of a credit market feedback loop, finding that when investors become more bullish this can predict positive returns in the short run, even if expected returns become more negative at longer horizons.