ResearchUpdate R e s e a r c h a n d S t a t i s t i c s G r o u p w w w . n e w y o r k f e d . o r g / r e s e a r c h

F e d e r a l R e s e r v e B a n k o f N e w Y o r k N u m b e r 1

2010

The Research and Statistics Groupis pleased to announce that theBank’s Board of Directors has

appointed James J. McAndrews andSimon M. Potter co-directors of researchand executive vice presidents. Previously,Jamie and Simon were associate directorsof research.

Jamie, director of financial research,joined the Bank in 1997. Previously, hewas a senior economist and researchadvisor at the Federal Reserve Bank ofPhiladelphia. He has served as a consult-ing economist to the Bank of England,the Reserve Bank of Australia, theSwedish Riksbank, the Bank of Japan,and the World Bank. Jamie is also a

Monetary Economics, the Journal ofBanking and Finance, and the Journal ofMoney, Credit, and Banking. Jamie holdsa B.A. and Ph.D. in economics from theUniversity of Iowa.

Simon, director of economic research,has been with the New York Fed since1998. Previously, Simon taught at UCLA,Johns Hopkins, NYU, and Princeton. Heis the recipient of National ScienceFoundation awards and has served onthe editorial boards of several academicjournals.

Simon has written extensively on non-linear dynamics over the business cycle,and his current research concentrates onforecasting the probability of recessions.

James J. McAndrews and Simon M. Potter Are Named Co-Directors of Research

A l s o i n t h i s i s s u e …

Study Describes Use of DSGE Models in Policy Analysis by Examining 2004 Pickup in U.S. Inflation . . . . . . . . . 2

Upstate New York’s Housing Markets Have Sidesteppedthe U.S. Boom-Bust Cycle. . . . . . . . . . . . . . . . . . . . . . . . 3

Most downloaded publications. . . . . . . . . . . . . . . . . . . . . . 4Staff Reports: New titles . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Papers recently published

by Research Group economists. . . . . . . . . . . . . . . . . . . 11Papers presented at conferences . . . . . . . . . . . . . . . . . . . 12Publications and papers: January-March . . . . . . . . . . . . 14

fellow of the WhartonFinancial InstitutionsCenter.

Jamie’s researchfocuses on the economicsof money and payments,monetary policy imple-mentation, and marketliquidity. Recent workhas appeared in theReview of Economics andStatistics, the Journal of

In recent years, there has been a sig-nificant evolution in the formulationand communication of monetary

policy by central banks. Many banksnow present their economic outlook andpolicy strategies to the public in a moreformal way, a process that uses modernanalytical tools and advanced econo-metric methods in forecasting and policysimulations. The development ofdynamic stochastic general equilibrium,or DSGE, models has played a majorrole in this process. These models,which emphasize the dependence ofcurrent choices on expected future out-comes, are familiar to policymakers andacademics—but they are not well knownto the public.

A study forthcoming in the EconomicPolicy Review seeks to broaden the public’s understanding of these impor-tant analytical tools (“Policy AnalysisUsing DSGE Models: An Introduction”) .Authors Argia M. Sbordone, AndreaTambalotti, Krishna Rao, and KieranWalsh introduce the basic structure,logic, and application of DSGE modelsand offer a simple illustration of how an estimated model in this class can beused to answer specific monetary policyquestions.

Using a simplified, small-scale DSGEspecification, designed to account forthree key macroeconomic variables—GDP growth, core inflation, and the federal funds rate—the authors analyzethe pickup in inflation in the UnitedStates in the first half of 2004. Inflationlevels, which were close to 1 percent at the beginning of 2003, climbed tovalues steadily above 2 percent throughthe end of 2008.

The exercise suggests that a significantportion of the inflation acceleration wasattributable to a change in inflationexpectations, which the model links to anincrease in the private sector’s perceptionof the Federal Reserve’s implicit inflationtarget. The main lesson to be learnedfrom the exercise, observe the authors, isthat “the most effective approach to con-trolling inflation is through the manage-ment of expectations, rather thanthrough actual movements of the policyinstrument.” The lesson is consistent with the large amount of private sectorattention and speculation that usuallysurrounds central bankers’ pronounce-ments on their likely future actions.

The article is available atwww.newyorkfed.org/research/epr/forthcoming/1003sbor.html.

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Recently, he has published in the Reviewof Economic Studies, the Journal ofEmpirical Finance, and the InternationalEconomic Review.

Simon holds a B.A. in philosophy, politics, and economics and an M.Phil. ineconomics from Oxford University, and aPh.D. in economics from the University of Wisconsin at Madison. ■

Study Describes Use of DSGE Models in Policy Analysis by Examining 2004 Pickup in U.S. Inflation

The United States has experienced asignificant boom and bust in realestate activity in the past decade.

A new study, however, concludes thatupstate New York has been largely insulated from the home-price volatilityexperienced in other parts of the countryduring the recession.

In “Bypassing the Bust: The Stabilityof Upstate New York’s Housing Marketsduring the Recession” (Current Issues inEconomics and Finance, vol. 16, no. 3),authors Jaison R. Abel and RichardDeitz assess the performance of upstateNew York’s housing markets during themost recent residential real estate cycleand compare the pattern of real estateactivity for the region with patterns forother U.S. metropolitan areas. They alsoexamine the prevalence of nonprimemortgage lending—the riskiest segmentof the residential mortgage market—andcompare the regional penetration andperformance of these loans with nationalpenetration and performance.

The study focuses on nine major metroareas upstate: Albany, Binghamton,Buffalo, Elmira, Glens Falls, Ithaca,Rochester, Syracuse, and Utica.

The authors find that upstate’s hous-ing markets have been fairly stable during the recession, with many metroareas outperforming the nation. Duringthe U.S. housing boom of 2000-06,home prices in Binghamton, Buffalo,Elmira, Rochester, Syracuse, and Utica

did not appreciate as rapidly as thenational average, although prices inAlbany, Glens Falls, and Ithaca outpacedit. Since then, home prices in everyupstate metro area have risen faster, orfallen more slowly, than the nationalaverage. Notably, Buffalo, Rochester, andSyracuse all ranked in the top 10 percentof metro areas in terms of home priceappreciation in 2009, with Buffalo rank-ing sixth overall.

Abel and Deitz also find that the pene -tration of nonprime loans in upstateNew York was far less significant than inother parts of the country, particularlywhen compared with metropolitan areasthat experienced a housing bust. Inaddition, these loans have performedbetter upstate than they have nationally.Generally, metro areas with a higherpenetration of nonprime loans by 2006—when activity peaked—experienced fasterhouse price increases, but also sufferedthe most significant declines once thereversal began. As a result, a largernumber of the nonprime loans thatoriginated in these areas have entereddelinquency or foreclosure. The authorsobserve that upstate’s relatively low incidence of nonprime mortgages andthe better-than-average performance of these loans contributed to the area’sstability.

The article is available atwww.newyorkfed.org/research/current_issues/ci16-3.html.

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Upstate New York’s Housing Markets Have Sidestepped the U.S. Boom-Bust Cycle

Listed below are the most sought afterResearch Group articles and papers from the New York Fed’s website

and from the Bank’s page on theSocial Science Research Network site(www.ssrn.com/link/FRB-New-York.html).

New York Fed website, first-quarter 2010:

■ “Understanding the Securitization of Subprime Mortgage Credit,” by Adam B. Ashcraft and Til Schuermann (Staff Reports, no. 318, March 2008) –3,414 downloads

■ “Is the International Role of the DollarChanging?” by Linda S. Goldberg(Current Issues in Economics andFinance, vol. 16, no. 1, January 2010) –3,345 downloads

■ “Policy Perspectives on OTCDerivatives Market Infrastructure,” by Darrell Duffie, Ada Li, and Theo Lubke (Staff Reports, no. 424, January 2010 ) – 3,264 downloads

SSRN website, first-quarter 2010:

■ “Understanding the Securitization of Subprime Mortgage Credit,” byAdam B. Ashcraft and Til Schuermann (Staff Reports, no. 318, March 2008) –856 downloads

■ “What Can We Learn from PrivatelyHeld Firms about ExecutiveCompensation?” by Rebel A. Cole andHamid Mehran (Staff Reports, no. 314,January 2008) – 367 downloads

■ “Broker-Dealer Risk Appetite andCommodity Returns,” by Erkko Etula(Staff Reports, no. 406, November 2008)–225 downloads

For lists of top-ten downloads, visit www.newyorkfed.org/research/top_downloaded/index.html.

Most Downloaded Publications

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P u b l i c a t i o n s a n d P a p e r s

The Research and Statistics Group produces a wide range of publications:

■ The Economic Policy Review—a policy-oriented journal focusing on economicand financial market issues.

■ EPR Executive Summaries—online versions of selected Economic Policy Reviewarticles, in abridged form.

■ Current Issues in Economics and Finance—concise studies of topical economicand financial issues.

■ Second District Highlights—a regional supplement to Current Issues.

■ Staff Reports—technical papers intended for publication in leading economicand finance journals, available only online.

■ Publications and Other Research—an annual catalogue of our research output.

MACROECONOMICSAND GROWTH

No. 421, January 2010Monetary Cycles, Financial Cycles, and the Business Cycle Tobias Adrian, Arturo Estrella, and Hyun Song Shin

One of the most robust stylized facts inmacroeconomics is the forecasting power ofthe term spread for future real activity. Theeconomic rationale for this forecastingpower usually appeals to expectations offuture interest rates, which affect the slopeof the term structure. This paper proposesa possible causal mechanism for the fore-casting power of the term spread, derivingfrom the balance sheet management offinancial intermediaries. When monetarytightening is associated with a flattening of the term spread, it reduces net interestmargin, which in turn makes lending lessprofitable, leading to a contraction in thesupply of credit. The authors provideempirical support for this hypothesis,thereby linking monetary cycles, financialcycles, and the business cycle.

No. 422, January 2010Financial Intermediation, Asset Prices,and Macroeconomic Dynamics Tobias Adrian, Emanuel Moench, and Hyun Song Shin

Fluctuations in the aggregate balancesheets of financial intermediaries provide awindow on the joint determination of assetprices and macroeconomic aggregates. Theauthors document that financial intermedi-ary balance sheets contain strong predictivepower for future excess returns on a broadset of equity, corporate, and Treasury bondportfolios. They also show that the sameintermediary variables that predict excessreturns forecast real economic activity andvarious measures of inflation. The study’s

findings point to the importance of financ-ing frictions in macroeconomic dynamicsand provide quantitative guidance for preemptive macroprudential and monetarypolicies.

No. 425, January 2010The Measurement of Rent Inflation Jonathan McCarthy and Richard W. Peach

Shelter has a large weight in the CPI andin the personal consumption expendituresdeflator, resulting in substantial scrutiny ofhow tenant rent and owners’ equivalentrent are measured in these price indexes.This study describes how the Bureau ofLabor Statistics (BLS) estimates tenant rentand owners’ equivalent rent. McCarthy andPeach then estimate alternative inflationrates for tenant rent and owners’ equivalentrent based on American Housing Surveydata, following BLS methodology as closelyas possible. Their alternative tenant rentinflation series is generally consistent withthe corresponding BLS series. However,their alternative owners’ equivalent rentinflation series is consistently lower thanthe corresponding BLS series by anamount large enough to have a significanteffect on the overall inflation rate. Thisresult is driven by the inverse relationshipbetween rent inflation and the level ofmonthly housing cost evident in theAmerican Housing Survey data.

No. 428, January 2010Macro Risk Premium and IntermediaryBalance Sheet Quantities Tobias Adrian, Emanuel Moench, and Hyun Song Shin

The macro risk premium measures thethreshold return for real activity thatreceives funding from savers. This paperbases its argument on the relationshipbetween the macro risk premium and thegrowth of financial intermediaries’ balance

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New Titles in the Staff Reports Series The following new staff reports are available atwww.newyorkfed.org/research/ staff_reports.

sheets. The spare capacity of their balancesheets determines the intermediaries’ riskappetite, which in turn determines the realprojects that receive funding and, hence,the supply of credit. Monetary policyaffects risk appetite by changing the abilityof intermediaries to leverage their capital.The authors estimate the time-varying riskappetite of financial intermediaries for theUnited States, Germany, the UnitedKingdom, and Japan, and study the jointdynamics of risk appetite using macro-economic aggregates for the United States.They argue that risk appetite is an impor-tant indicator of monetary conditions.

No. 433, February 2010The Paradox of ToilGauti Eggertsson

This paper proposes a new paradox: theparadox of toil. Suppose everyone wakesup one day and decides they want to workmore. What happens to aggregate employ-ment? Eggertsson shows that, under certainconditions, aggregate employment falls;that is, there is less work in the aggregatebecause everyone wants to work more. Theconditions for the paradox to apply are thatthe short-term nominal interest rate is zeroand there are deflationary pressures andoutput contraction, much as during theGreat Depression in the United States and,perhaps, the 2008 financial crisis in largeparts of the world. The paradox of toil istightly connected to the Keynesian idea ofthe paradox of thrift. Both are examples ofa fallacy of composition.

No. 434, February 2010Correlated Disturbances and U.S. Business CyclesVasco Cúrdia and Ricardo Reis

The dynamic stochastic general equilibrium(DSGE) models used to study businesscycles typically assume that exogenousdisturbances are independent first-order

autoregressions. This paper relaxes thistight and arbitrary restriction by allowingfor disturbances that have a rich contem-poraneous and dynamic correlation structure. The authors’ first contribution isa new Bayesian econometric method thatuses conjugate conditionals to allow forfeasible and quick estimation of DSGEmodels with correlated disturbances. Theirsecond contribution is a reexamination ofU.S. business cycles. They find that allow-ing for correlated disturbances resolvessome conflicts between estimates fromDSGE models and those from vectorautoregressions and that a key missingingredient in the models is countercyclicalfiscal policy. According to the authors’estimates, government spending and tech-nology disturbances play a larger role inthe business cycle than previouslyascribed, while changes in markups areless important.

No. 435, February 2010Labor-Dependent Capital IncomeTaxation That Encourages Work and SavingSagiri Kitao

Kitao proposes a simple mechanism of capital taxation that is negatively correlatedwith labor supply. Using a life-cycle modelof heterogeneous agents, she shows thatthis tax scheme provides a strong workincentive when households possess largeassets and high productivity later in the lifecycle, when they would otherwise workless. This reformed system also adds to thesaving motive and raises aggregate capital.Moreover, the increased economic activitiesexpand the tax base, and the revenue-neutral reform results in a lower averagetax rate. The paper finds that this taxscheme improves long-run welfare and thatthe majority of current generations wouldexperience a welfare gain from a transitionto the reformed system.

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No. 436, March 2010Social Security, Benefit Claiming, andLabor Force Participation: A QuantitativeGeneral Equilibrium ApproachSelahattin mrohoro lu and Sagiri Kitao

mrohoro lu and Kitao use a general equi-librium model of overlapping generationsthat incorporates endogenous saving,labor force participation, work hours, andSocial Security benefit claims to study theimpact of three Social Security reforms: 1) a reduction in benefits and payrolltaxes; 2) an increase in the earliest retire-ment age, to sixty-four from sixty-two; and3) an increase in the normal retirementage, to sixty-eight from sixty-six. They findthat a 50 percent cut in the scope of thecurrent system significantly raises assetholdings and the labor input, primarilythrough higher participation of olderworkers, and reduces the shortfall of theSocial Security budget through a reduc-tion in early claiming. Increasing the normal retirement age also raises savingand the labor supply, but the effects aresmaller. Postponing the earliest retirementage has only a negligible effect.

No. 440, March 2010Productivity and the Density of Human CapitalJaison R. Abel, Ishita Dey, and Todd M. Gabe

The authors estimate a model of urbanproductivity in which the agglomerationeffect of density is enhanced by a metro-politan area’s stock of human capital.Estimation accounts for potential biasesdue to the endogeneity of density andindustrial composition effects. Using newinformation on output per worker for U.S.metropolitan areas along with a measure of density that accounts for the spatial dis-tribution of population, they find that adoubling of density increases productivity

by 2 to 4 percent. Consistent with theoriesof learning and knowledge spillovers incities, the authors demonstrate that theelasticity of average labor productivity withrespect to density increases with humancapital. Metropolitan areas with a humancapital stock one standard deviation belowthe mean realize no productivity gain,while doubling density in metropolitanareas with a human capital stock one standard deviation above the mean yieldsproductivity benefits that are about twicethe average.

INTERNATIONAL

No. 430, February 2010Loss Aversion, Asymmetric MarketComovements, and the Home Bias Kevin Amonlirdviman and Carlos Carvalho

The different utility impact of wealth gainsand losses leads loss-averse investors tobehave similarly to investors with highrisk aversion. So shouldn’t these agentsperceive larger gains from internationaldiversification than standard expected-utility preference agents with plausiblelevels of risk aversion? They might not,because comovements in internationalstock markets are asymmetric:Correlations are higher in market down-turns than in upturns. This asymmetrydampens the gains from diversificationrelatively more for loss-averse investors.Amonlirdviman and Carvalho analyze theportfolio problem of such an investor whohas to choose between home and foreignequities in the presence of asymmetriccomovement in returns. Perhaps surpris-ingly, in the context of the home bias puzzle they find that the loss-averseinvestors behave similarly to those withstandard expected-utility preferences andplausible levels of risk aversion.

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MICROECONOMICS

No. 432, February 2010Subprime Mortgage Lending in New YorkCity: Prevalence and PerformanceEbiere Okah and James Orr

Subprime mortgage lending expanded inNew York City between 2004 and mid-2007, and delinquencies on these subprimeloans have been rising sharply. This studyuses a rich, loan-level data set of the city’soutstanding subprime loans as of January2009 to describe the main features of thislending and to model the performance ofthese loans. These subprime loans repre-sent a smaller share of total housing unitsin the city than is true nationwide. In addi-tion, they are found to be clustered inneighborhoods where average borrowercredit quality is low and, unlike primemortgage loans, where African-Americansand Hispanics constitute relatively largeshares of the population. The authors esti-mate a model of the likelihood that theseloans will become seriously delinquent andfind a significant role for credit quality ofborrowers, debt-to-income and loan-to-value ratios at the time of loan origination,and estimates of the loss of home equity.

BANKING AND FINANCE

No. 423, January 2010The Federal Reserve’s Commercial PaperFunding Facility Tobias Adrian, Karin Kimbrough, and Dina Marchioni

The Federal Reserve created the CommercialPaper Funding Facility (CPFF) in the midstof severe disruptions in money markets following the bankruptcy of Lehman Brotherson September 15, 2008. The CPFF financesthe purchase of highly rated unsecured and asset-backed commercial paper fromeligible issuers via primary dealers. Thefacility is a liquidity backstop to U.S. issuersof commercial paper, and its creation was

part of a range of policy actions undertakenby the Federal Reserve to provide liquidityto the financial system. This paper docu-ments aspects of the financial crisis rele-vant to the creation of the CPFF, reviewsthe operation of the CPFF, discusses use of the facility, and draws conclusions forlender-of-last-resort facilities in a market-based financial system.

No. 424, January 2010Policy Perspectives on OTC DerivativesMarket Infrastructure Darrell Duffie, Ada Li, and Theo Lubke

In the wake of the recent financial crisis,over-the-counter (OTC) derivatives havebeen blamed for increasing systemic risk.Although OTC derivatives were not a central cause of the crisis, the complexityand limited transparency of the marketreinforced the potential for excessive risk taking, as regulators did not have aclear view of how OTC derivatives werebeing used. This paper discusses how theNew York Fed and other regulators couldimprove weaknesses in the OTC deriva-tives market through stronger oversightand better regulatory incentives for infrastructure improvements to reducecounterparty credit risk and bolster marketliquidity, efficiency, and transparency. Usedresponsibly with these reforms, over-the-counter derivatives can provide importantrisk management and liquidity benefits tothe financial system.

No. 426, January 2010Repo Market Effects of the TermSecurities Lending Facility Michael J. Fleming, Warren B. Hrung, and Frank M. Keane

The Term Securities Lending Facility(TSLF) was introduced by the FederalReserve to promote liquidity in the financing markets for Treasury and othercollateral. The authors evaluate one aspectof the program—the extent to which it hasnarrowed repo spreads between Treasury

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collateral and less liquid collateral. Theyfind that TSLF operations have precipi-tated a significant narrowing of repospreads. More refined tests indicate themarket conditions and types of operationsassociated with the program’s effective-ness. Various additional tests, including asplit-sample test, suggest that the authors’findings are robust.

No. 427, January 2010Performance Maximization of ActivelyManaged Funds Paolo Guasoni, Gur Huberman, and Zhenyu Wang

Ratios that indicate the statistical signifi-cance of a fund’s alpha typically appraiseits performance. A growing literature suggests that even in the absence of anyability to predict returns, holding optionspositions on the benchmark assets or trading frequently can significantlyenhance performance ratios. This paperderives the performance-maximizing strategy—a variant of buy-write—and theleast upper bound on such performanceenhancement, thereby showing that ifcommon equity indexes are used asbenchmarks, the potential performanceenhancement from trading frequently isusually negligible. The enhancement fromholding options can be substantial if theimplied volatilities of the options arehigher than the volatilities of the bench-mark returns.

No. 429, January 2010Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs Linda S. Goldberg, Craig Kennedy, and Jason Miu

Following a scarcity of dollar fundingavailable internationally to banks andfinancial institutions, in December 2007the Federal Reserve began to establish orexpand Temporary Reciprocal CurrencyArrangements with fourteen foreign cen-tral banks. These central banks had thecapacity to use these swap facilities to

provide dollar liquidity to institutions intheir jurisdictions. This paper presents thedevelopments in the dollar swap facilitiesthrough the end of 2009. The facilitieswere a response to dollar funding short-ages outside the United States during aperiod of market dysfunction. Formalresearch, as well as more descriptiveaccounts, suggests that the dollar swaplines among central banks were effectiveat reducing the dollar funding pressuresabroad and stresses in money markets.The central bank dollar swap facilities arean important part of the toolbox for deal-ing with systemic liquidity disruptions.

No. 431, February 2010Financial Amplification Mechanisms andthe Federal Reserve’s Supply of Liquidityduring the Crisis Asani Sarkar and Jeffrey Shrader

The small decline in the value of mortgage-related assets relative to the large totallosses associated with the financial crisissuggests the presence of financial amplifi-cation mechanisms, which allow relativelysmall shocks to propagate through thefinancial system. Sarkar and Shraderreview the literature on financial amplifi-cation mechanisms and discuss theFederal Reserve’s interventions during different stages of the crisis in light of thisliterature. They interpret the Fed’s early-stage liquidity programs as working todampen balance sheet amplifications aris-ing from the positive feedback betweenfinancial constraints and asset prices. Bycomparison, the Fed’s later-stage crisisprograms take into account adverse-selection amplifications that operate viaincreases in credit risk and the externalityimposed by risky borrowers on safe ones.Finally, the authors provide new empiricalevidence that increases in the FederalReserve’s liquidity supply reduce interestrates during periods of high liquidity risk.Their analysis has implications for theimpact on market prices of a potentialwithdrawal of liquidity supply by the Fed.

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No. 437, March 2010Stressed, Not Frozen: The Federal FundsMarket in the Financial CrisisGara Afonso, Anna Kovner, and Antoinette Schoar

This paper examines the impact of thefinancial crisis of 2008, specifically thebankruptcy of Lehman Brothers, on thefederal funds market. The authors find thatamounts and spreads became more sensi-tive to a borrowing bank’s characteristics,lending rates increased, and banks becamemore restrictive in their choice of counter-parties. The market did not seem to expandto meet the increased demand predicted bythe drop in other bank funding markets.Afonso, Kovner, and Schoar examine discount window borrowing as a proxy forunmet fed funds demand and find that the fed funds market is not indiscriminate.As expected, borrowers who access the discount window have a lower return onassets. On the lender side, the characteristicsof the lending bank do not seem to signifi-cantly affect the amount of interbank loansit makes. In particular, the authors do notfind that worse-performing banks beganhoarding liquidity and indiscriminatelyreducing their lending.

No. 438, March 2010Liquidity-Saving Mechanisms inCollateral-Based RTGS Payment SystemsMarius Jurgilas and Antoine Martin

This paper studies banks’ incentives forchoosing the timing of their payment sub-missions in a collateral-based real-timegross settlement payment system and theway in which these incentives change withthe introduction of a liquidity-saving mech-anism (LSM). Jurgilas and Martin showthat an LSM allows banks to economize oncollateral while also providing incentives tosubmit payments earlier. The reason is that,

in their model, an LSM allows payments tobe matched and offset, helping to settlepayment cycles in which each bank mustreceive a payment that provides sufficientfunds to allow the settlement of its ownpayment. In contrast to fee-based systems,for which Martin and McAndrews (2008a)show that introducing an LSM can lead to lower welfare, in the authors’ model welfare is always higher with an LSM in acollateral-based system.

No. 439, March 2010The Changing Nature of FinancialIntermediation and the Financial Crisis of 2007-09Tobias Adrian and Hyun Song Shin

The financial crisis of 2007-09 highlightedthe changing role of financial institutionsand the growing importance of the “shadowbanking system,” which grew out of thesecuritization of assets and the integrationof banking with capital market develop-ments. This trend was most pronounced inthe United States, but it also had a pro-found influence on the global financialsystem as a whole. In a market-basedfinancial system, banking and capital market developments are inseparable, andfunding conditions are tied closely to fluctuations in the leverage of market-based financial intermediaries. Balancesheet growth of market-based financialintermediaries provides a window on liquidity by indicating the availability of credit, while contractions of balancesheets have tended to precede the onset offinancial crises. The authors describe thechanging nature of financial intermedia-tion in the market-based financial system,chart the course of the recent financialcrisis, and outline the policy responsesthat have been implemented by theFederal Reserve and other central banks.

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No. 441, March 2010Large-Scale Asset Purchases by theFederal Reserve: Did They Work?Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack

Since December 2008, the Federal Reserve’straditional policy instrument, the targetfederal funds rate, has been effectively atits lower bound of zero. In order to furtherease the stance of monetary policy as theeconomic outlook deteriorated, the FederalReserve purchased substantial quantities of assets with medium and long maturities.

The authors explain how these purchaseswere implemented and discuss the mechanismsthrough which they can affect the economy.They present evidence that the purchasesled to economically meaningful and long-lasting reductions in longer term interestrates on a range of securities, includingsecurities that were not included in thepurchase programs. These reductions ininterest rates primarily reflect lower riskpremiums, including term premiums,rather than lower expectations of futureshort-term interest rates. ■

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Stefano Eusepi. 2010. “Central BankCommunication and the Liquidity Trap.”Journal of Money, Credit, and Banking 42,no. 2-3 (March-April): 373-97.

Andrea Ferrero. 2010. “Current AccountDynamics and Monetary Policy,” with Mark Gertler and Lars E. O. Svensson. In Jordi Galí and Mark Gertler, eds.,International Dimensions of MonetaryPolicy, 199-244. NBER conference volume.Chicago: University of Chicago Press.

Anna Kovner. 2010. “Buy Local? TheGeography of Venture Capital,” with Henry Chen, Paul Gompers, and Josh Lerner.Journal of Urban Economics 67, no. 1(January): 90-102.

Hamid Mehran and Stavros Peristiani. 2010.“Financial Visibility and the Decision to GoPrivate.” Review of Financial Studies 23,no. 2 (February): 519-47.

Simon Potter. 2010. “Modeling the Dynamicsof Inflation Compensation,” with MarkusJochmann and Gary Koop. Journal ofEmpirical Finance 17, no. 1 (January): 157-67.

Robert Rich and Joseph Tracy. 2010. “TheRelationships among Expected Inflation,Disagreement, and Uncertainty: Evidencefrom Matched Point and Density Forecasts.”Review of Economics and Statistics 92, no. 1(February): 200-7.

Argia Sbordone. 2010. “Globalization andInflation Dynamics: The Impact of IncreasedCompetition.” In Jordi Galí and Mark Gertler,eds., International Dimensions of MonetaryPolicy, 547-79. NBER conference volume.Chicago: University of Chicago Press. ■

Recently Published

“Productivity and the Density of HumanCapital,” Jaison Abel. Southern RegionalScience Association annual meeting,Washington, D.C., March 27. With IshitaDey and Todd Gabe.

“Precautionary Demand and Liquidity inPayment Systems,” Gara Afonso. Bank ofMexico seminar, Mexico City, Mexico,March 4. With Hyun Song Shin.

“Aggregation and the PPP Puzzle in aSticky-Price Model,” Carlos Carvalho.Harvard University International EconomicsWorkshop, Cambridge, Massachusetts,February 24. With Fernanda Nechio.

“Estimating the Cross-Sectional Distributionof Price Stickiness from Aggregate Data,”Carlos Carvalho. American EconomicAssociation–Allied Social ScienceAssociations annual meeting, Atlanta,Georgia, January 5. With Niels Dam.

“Do Charter Schools Crowd Out PrivateEnrollment?” Rajashri Chakrabarti.American Economic Association–AlliedSocial Science Associations annual meeting, Atlanta, Georgia, January 4. With Joydeep Roy.

“Effect of Constraints on TieboutCompetition,” Rajashri Chakrabarti.American Education Finance Associationconference, Richmond, Virginia, March 19.With Joydeep Roy. Also presented at theNBER Fiscal Federalism Conference, San Diego, California, March 27.

“The Effects of No Child Left Behind onPublic Schools,” Rajashri Chakrabarti.American Education Finance Associationconference, Richmond, Virginia, March 20.

“The Great Escape? A QuantitativeInvestigation of the Fed’s NonstandardPolicies,” Marco Del Negro, GautiEggertsson, and Andrea Ferrero. WithNobuhiro Kiyotaki. Presented by Ferrero at a Bank of Portugal seminar, Lisbon,Portugal, February 17, and at the NBERProgram on Monetary Economics meeting,held at the Federal Reserve Bank of New York, New York City, March 5.Presented by Del Negro at the FederalReserve Bank of San Francisco Conferenceon Financial Market Imperfections andMacroeconomics, San Francisco,California, March 5.

“Repo Market Effects of the TermSecurities Lending Facility,” MichaelFleming. American EconomicAssociation–Allied Social ScienceAssociations annual meeting, Atlanta,Georgia, January 3.

“Central Bank Dollar Swap Lines andOverseas Dollar Funding Costs,” LindaGoldberg. American EconomicAssociation–Allied Social ScienceAssociations annual meeting, Atlanta,Georgia, January 4. With Craig Kennedyand Jason Miu.

“Global Banks and International ShockTransmission: Evidence from the Crisis,”Linda Goldberg. International MonetaryFund–Banque de France Conference onEconomic Linkages, Spillovers, and theFinancial Crisis, Paris, France, January 28.With Nicola Cetorelli.

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Papers Presented by Economists in the Research and Statistics Group

“Historical Evolution of InternationalBanking,” Linda Goldberg. Presentation tothe Working Group of the Committee onthe Global Financial System, Bank forInternational Settlements, Frankfurt,Germany, March 12.

“Micro, Macro, and Strategic Forces inInternational Trade Invoicing,” LindaGoldberg. Fifth Annual Workshop onGlobal Interdependence, cosponsored bythe Centre for Economic Policy Researchand Deutsche Bundesbank, Eltville,Germany, March 12. With Cédric Tille.

“Bailouts and Financial Fragility,” ToddKeister. IESE Business School Workshopon Industrial Organization and Banking,University of Navarra, Barcelona, Spain,March 9.

“Banking Panics and Policy Responses,”Todd Keister. European UniversityInstitute Macroeconomics Workshop,Florence, Italy, January 25.

“A Life Cycle Model of Trans-AtlanticEmployment Experiences,” Sagiri Kitao.American Economic Association–AlliedSocial Science Associations annual meeting,Atlanta, Georgia, January 4. With Lars Ljungqvist and Thomas Sargent.

“Compensation and Leverage,” HamidMehran. University of Cambridge seminar,Cambridge, United Kingdom, January 21.

“Rollover Risk during the Crisis,”Asani Sarkar. American EconomicAssociation–Allied Social ScienceAssociations annual meeting, Atlanta,Georgia, January 3. With Angelo Ranaldo.

“MBS Ratings and the Mortgage CreditBoom,” James Vickery. American EconomicAssociation–Allied Social ScienceAssociations annual meeting, Atlanta,Georgia, January 4. With Adam Ashcraftand Paul Goldsmith-Pinkham. Also presented at a Kenan-Flagler School ofBusiness seminar, University of NorthCarolina at Chapel Hill, Chapel Hill, NorthCarolina, February 19, and a Haas Schoolof Business seminar, University of Californiaat Berkeley, Berkeley, California, February 24.

“Do Female Faculty Influence FemaleStudents’ Choice of College Major, andWhy?” Basit Zafar. American EconomicAssociation–Allied Social ScienceAssociations annual meeting, Atlanta,Georgia, January 4. With Yi Qian. ■

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Research and Statistics GroupPublications and Papers: January-March 2010Publications are available atwww.newyorkfed.org/research/publication_annuals/index.html.

ECONOMIC POLICY REVIEWForthcoming

Policy Analysis Using DSGE Models:An IntroductionArgia M. Sbordone, Andrea Tambalotti,Krishna Rao, and Kieran Walsh

Special Issue: Central Bank Liquidity Toolsand Perspectives on Regulatory Reform

Central Bank Liquidity ToolsOpening RemarksPatricia C. Mosser

Conference Overview and Summary of ProceedingsMatthew Denes, Daniel Greenwald,Nicholas Klagge, Ging Ce Ng, JeffreyShrader, Michael Sockin, and John Sporn

Central Bank Tools and LiquidityShortagesStephen G. Cecchetti and Piti Disyatat

Provision of Liquidity through thePrimary Credit Facility during theFinancial Crisis: A Structural AnalysisErhan Artuç and Selva Demiralp

Perspectives on Regulatory ReformInformational Easing: ImprovingCredit Conditions through the Release of InformationMatthew Pritsker

Systemic Risk and Deposit Insurance PremiumsViral V. Acharya, João A. C. Santos, and Tanju Yorulmazer

CURRENT ISSUES INECONOMICS AND FINANCE,VOL. 16

No. 1, January 2010Is the International Role of the DollarChanging?Linda S. Goldberg

No. 2, February 2010The Unemployment Gender Gap during the 2007 RecessionAyşegül Şahin, Joseph Song, and Bart Hobijn

No. 3, March 2010Bypassing the Bust: The Stability of Upstate New York’s Housing Markets during the RecessionJaison R. Abel and Richard Deitz

STAFF REPORTS

No. 421, January 2010Monetary Cycles, Financial Cycles, and the Business CycleTobias Adrian, Arturo Estrella, and Hyun Song Shin

No. 422, January 2010Financial Intermediation, Asset Prices,and Macroeconomic DynamicsTobias Adrian, Emanuel Moench, and Hyun Song Shin

No. 423, January 2010 The Federal Reserve’s Commercial PaperFunding Facility Tobias Adrian, Karin Kimbrough, and Dina Marchioni

No. 424, January 2010Policy Perspectives on OTC DerivativesMarket InfrastructureDarrell Duffie, Ada Li, and Theo Lubke

No. 425, January 2010The Measurement of Rent Inflation Jonathan McCarthy and Richard W. Peach

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No. 426, January 2010Repo Market Effects of the TermSecurities Lending Facility Michael J. Fleming, Warren B. Hrung, and Frank M. Keane

No. 427, January 2010Performance Maximization of ActivelyManaged FundsPaolo Guasoni, Gur Huberman, and Zhenyu Wang

No. 428, January 2010Macro Risk Premium and IntermediaryBalance Sheet QuantitiesTobias Adrian, Emanuel Moench, and Hyun Song Shin

No. 429, January 2010Central Bank Dollar Swap Lines and Overseas Dollar Funding Costs Linda S. Goldberg, Craig Kennedy, and Jason Miu

No. 430, February 2010Loss Aversion, Asymmetric MarketComovements, and the Home BiasKevin Amonlirdviman and Carlos Carvalho

No. 431, February 2010Financial Amplification Mechanisms and the Federal Reserve’s Supply of Liquidity during the CrisisAsani Sarkar and Jeffrey Shrader

No. 432, February 2010Subprime Mortgage Lending in New YorkCity: Prevalence and PerformanceEbiere Okah and James Orr

No. 433, February 2010The Paradox of Toil Gauti Eggertsson

No. 434, February 2010Correlated Disturbances and U.S. Business Cycles Vasco Cúrdia and Ricardo Reis

No. 435, February 2010Labor-Dependent Capital IncomeTaxation That Encourages Work and Saving Sagiri Kitao

No. 436, March 2010Social Security, Benefit Claiming, andLabor Force Participation: A QuantitativeGeneral Equilibrium Approach Selahattin mrohoro lu and Sagiri Kitao

No. 437, March 2010Stressed, Not Frozen: The Federal FundsMarket in the Financial Crisis Gara Afonso, Anna Kovner, and Antoinette Schoar

No. 438, March 2010Liquidity-Saving Mechanisms inCollateral-Based RTGS Payment Systems Marius Jurgilas and Antoine Martin

No. 439, March 2010The Changing Nature of FinancialIntermediation and the Financial Crisis of 2007-09 Tobias Adrian and Hyun Song Shin

No. 440, March 2010Productivity and the Density of Human Capital Jaison R. Abel, Ishita Dey, and Todd M. Gabe

No. 441, March 2010Large-Scale Asset Purchases by theFederal Reserve: Did They Work? Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack

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

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