The importance of a firm's balance sheet for determining its investment and employment decisions is the central assumption of macroeconomic models of 'debt deflation' or 'debt overhang.' According to these models, firm investment decisions are influenced not only by the fundamental opportunity...

One of the most difficult issues in the measurement of bank interest rate risk is the interest rate risk of liquid retail deposits. In this study, estimates are developed for the interest rate sensitivity of the value of interest-bearing checkable deposits (OCDs) and savings deposits defined to...

A monetary policy strategy that keeps inflation expectations solidly anchored in line with a clearly communicated definition of price stability supports the achievement of both price stability and economic activity goals. Providing an enduring nominal anchor succeeds in taming inflation scares...

Comparing and contrasting the Fed’s and ECB’s policy responses to the 2008 Global Financial Crisis (GFC) and the COVID-19 pandemic highlights the importance of the fiscal dimension of monetary policy and the pitfalls that can arise when the synergy of fiscal and monetary policy is neglected...

A burgeoning part of the monetary policy design literature posits that optimal monetary policy is the solution to a constrained optimization problem where the monetary authority has the discretion to minimize a social welfare function, taking the economy and other policies as given. Davig and...

When properly employed, bank stress tests can be effective as a supervisory tool to strengthen the resilience of a banking institution or a banking system overall. During the global financial crisis, stress tests were also used in public exercises intended to increase confidence in the banking...

The monetary policy of the ECB and the Fed over the past few years are compared and contrasted. The two central banks have similar price stability objectives and faced similar conditions early in the crisis, including the zero bound on short-term interest rates. Since mid-2012, their policies...

We develop a simple error-correction model, based on a well known theory espoused by Benjamin Graham and David Dodd, and others, which presumes stock returns tend to restore an equilibrium relationship between the forecasted earnings yield on common stocks and the yield on bonds. The estimation...

The ECB is the most important institution for the success of the EMU. It started successfully but the crisis revealed weaknesses related to the incomplete nature of the EMU.The ECB was too timid in using its power, which deepened the euro crisis and led to divergences that threaten the viability...