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Working Paper Archives

Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critial comment.

Banking

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

We study the design of lender of last resort interventions and show that the provision of long-term liquidity incentivizes purchases of high-yield short-term securities by banks.

The Persistence of Financial Distress

Using recently available proprietary panel data, we show that while many (35%) US consumers experience financial distress at some point in the life cycle, most of the events of financial distress are primarily concentrated in a much smaller proportion of consumers in persistent trouble.

Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock

Bank lending booms and asset price booms are often intertwined. Although a fundamental shock might trigger an asset boom, aggressive lending can push asset prices higher, leading to more lending, and so on. Such a dynamic seems to have characterized the agricultural land boom surrounding World War I.

Bank Panics and Scale Economies

A bank panic is an expectation-driven redemption event that results in a self-fulfilling prophecy of losses on demand deposits.

A Survey of the Empirical Literature on U.S. Unconventional Monetary Policy

This paper reviews and critically evaluates the empirical literature on the effects of U.S. unconventional monetary policy on both financial markets and the real economy. In order to understand how such policies could work, we also briefly review the literature on the theory of such policies.

Near-Money Premiums, Monetary Policy, and the Integration of Money Markets:Lessons from Deregulation

The 1960s and 1970s witnessed rapid growth in the markets for new money market instruments, such as negotiable certificates of deposit (CDs) and Eurodollar deposits, as banks and investors sought ways around various regulations affecting funding markets.

Effects of Credit Supply on Unemployment and Inequality

The Great Recession, which was preceded by the financial crisis, resulted in higher unemployment and inequality.

Did the Founding of the Federal Reserve Affect the Vulnerability of the Interbank System to Contagion Risk?

As a result of legal restrictions on branch banking, an extensive interbank system developed in the United States during the nineteenth century to facilitate interregional payments and flows of liquidity and credit.

Interbank Markets and Banking Crises: New Evidence on the Establishment and Impact of the Federal Reserve

This paper examines the impact of the Federal Reserve’s founding on seasonal pressures and contagion risk in the interbank system.

The Evolution of Scale Economies in U.S. Banking

Continued consolidation of the U.S. banking industry and general increase in the size of banks has prompted some policymakers to consider policies to discourage banks from getting larger, including explicit caps on bank size.

Current Federal Reserve Policy Under the Lens of Economic History: A Review Essay

This review essay is intended as a critical review of Humpage (2015), and it expands on the issues raised in that volume.

Banker Preferences, Interbank Connections, and the Enduring Structure of the Federal Reserve System

Established by a three person committee in 1914, the structure of the Federal Reserve System has remained essentially unchanged ever since, despite criticism at the time and over ensuing decades.

Preventing Bank Runs

Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria.

Labor Market Upheaval, Default Regulations, and Consumer Debt

In 2005, reforms made formal personal bankruptcy much more costly. Shortly after, the US began to experience its most severe recession in seventy years, and while personal bankruptcy rates rose, they rose only modestly given the severity of the rise in unemployment.

Understanding the Accumulation of Bank and Thrift Reserves during the U.S. Financial Crisis

The level of aggregate excess reserves held by U.S. depository institutions increased significantly at the peak of the 2007-09 financial crisis.

Too big to cheat: Efficiency and Investment in Partnerships

Private information may limit insurance possibilities when a few agents form a partnership to pool idiosyncratic risk.

The Lender of Last Resort: Lessons from the Fed’s First 100 Years

We review the responses of the Federal Reserve to financial crises over the past 100 years. The authors of the Federal Reserve Act in 1913 created an institution that they hoped would prevent banking panics from occurring.

Bankruptcy and Delinquency in a Model of Unsecured Debt

This paper documents and interprets a fact central to the dynamics of informal consumer debt default: delinquency does not mean a persistent cessation of payment.

Why Doesn’t Technology Flow from Rich to Poor Countries?

What is the role of a country’s financial system in determining technology adoption? To examine this, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation.

Loan Regulation and Child Labor in Rural India

We study the impact of loan regulation in rural India on child labor with an overlapping-generations model of formal and informal lending, human capital accumulation, adverse selection, and differentiated risk types.

Econometric Modeling of Exchange Rate Volatility and Jumps

This chapter reviews the rapid advances in foreign exchange volatility modeling made in the last three decades.

Federal Reserve Lending to Troubled Banks During the Financial Crisis, 2007-10

Numerous commentaries have questioned both the legality and appropriateness of Federal Reserve lending to banks during the recent financial crisis.

Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

We use a regression discontinuity approach and present new institutional evidence to investigate whether affordable housing policies influenced the market for securitized subprime mortgages.

Basel Accord and Financial Intermediation: The Impact of Policy

This paper studies loan activity in a context where banks must follow Basel Accord-type rules and acquire financing from households. Loan activity typically decreases when entrepreneurs’ investment returns decline, and we study which type of policy could revigorate an economy in a trough.

Credit Scoring and Loan Default

This paper introduces a measure of credit score performance that abstracts from the influence of "situational factors." Using this measure, we study the role and effectiveness of credit scoring that underlied subprime securities during the mortgage boom of 2000-2006.

The Effect of Neighborhood Spillovers on Mortgage Selection

In this paper we analyze how spillovers in mortgage adoption affect mortgage product choice across neighborhoods and across borrowers of different racial or ethnic groups.

Differences in Subprime Loan Pricing Across Races and Neighborhoods

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion

Did Doubling Reserve Requirements Cause the Recession of 1937-1938? A Microeconomic Approach

In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy.

The Promise and Performance of the Federal Reserve as Lender of Last Resort 1914-1933

This paper examines the origins and early performance of the Federal Reserve as lender of last resort. The Fed was established to overcome the problems of the National Banking era, in particular an “inelastic” currency and the absence of an effective lender of last resort.

Financing Development: The Role of Information Costs

To address how technological progress in financial intermediation affects the economy, a costly state verification framework is embedded into the standard growth model. The framework has two novel ingredients.


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