I examine the impact of the Federal Reserve's balance sheet reduction on short-term interest rates emanating from the declining supply of reserve balances. Using an exogenous shift in the supply of reserves, I estimate that by January 2019, when the Fed will have reduced its portfolio by $500...

This study documents that asset purchase programs can dampen market liquidity. It uses a unique dataset of global euro-denominated covered bonds, which quantitative easing has affected to a larger extent than other markets. While the start of the central bank purchases amplifies liquidity for...

This paper presents new empirical evidence to support the hypothesis that positive money supply shocks drive short-term interest rates down. We then present a quantitative, general equilibrium model which is consistent with the hypothesis. The two key features of our model are that (i) money...

Recent turmoil in financial markets endorses the need for rigorous handling and integration of asset liquidity risk into Value-at-Risk (VaR) models. In this work we develop and test measures of certain kinds of asset liquidity risk that is useful for completing the definition of market risk and...

Several recent papers provide strong empirical support for the view that an expansionary monetary policy disturbance generates a persistent decrease in interest rates and a persistent increase in output and employment. Existing quantitative general equilibrium models, which allow for capital...

Conventional wisdom holds that unanticipated expansionary monetary policy shocks cause transient but persistent decreases in real and nominal interest rates. However a number of econometric studies argue that the evidence favors the opposite view, namely that these shocks actually raise, rather...

This paper assesses the sources of volatility persistence in Euro Area money market interest rates and the existence of linkages relating volatility dynamics. The main findings of the study are as follows. Firstly, there is evidence of stationary long memory, of similar degree, in all series....

The overnight interest rate is the price paid for one day loans and defines the short end of the yield curve. It is the equilibrium outcome of supply and demand for bank reserves. This paper models the intertemporal decision problems in the reserve market for both central and commercial banks....

We model the interbank market for overnight credit with heterogeneous banks and asymmetric information. An unsophisticated bank just trades to compensate its liquidity imbalance, while a sophisticated bank will exploit its private information about the liquidity situation in the market. It is...

Do stock prices of publicly listed companies respond to changes in transaction costs? Using the SEC's pilot program that increased the tick size for approximately 1,200 randomly chosen stocks, we find a stock price decrease between 1.75% and 3.2% for small spread stocks affected by the larger...

Canada's Large Value Transfer System (LVTS) is in the process of being replaced by a real-time gross settlement (RTGS) system. A pure RTGS system typically requires participants to hold large amounts of intraday liquidity in order to settle their payment obligations. Implementing one or more...

We estimate the welfare costs of inflation originating from lack of liquidity satiation - as in Bailey (1956), Friedman (1969), Lucas (2000), and Ireland (2009) - for the U.S., U.K., Canada, and three countries/economic areas (Switzerland, Sweden, and the Euro area) in which interest rates have...

We study how the risks to future liquidity flow across corporate bond, Treasury, and stock markets. We document distribution “flight-to-safety” effects: a deterioration in the liquidity of high-yield corporate bonds forecasts an increase in the average liquidity of Treasury securities and a...

We estimate the welfare costs of inflation originating from lack of liquidity satiation - as in Bailey (1956), Friedman (1969), Lucas (2000), and Ireland (2009) - for the U.S., U.K., Canada, and three countries/economic areas (Switzerland, Sweden, and the Euro area) in which interest rates have...

This article analyzes the behavioral effects of unemployment benefits (UB) and it characterizes their optimal level when jobless people, who can carry out a subsistence activity, only survive if they have access to a minimum consumption level. Our model shows that if the level of UB is low...

Quantitative easing could improve market liquidity through many channels such as relaxing bank funding constraints, increasing risk appetite, and facilitating trades. However, it can also reduce market liquidity when the increase in the central bank's holdings of certain securities leads to a...

We estimate the effects of the liquidity coverage ratio (LCR), a liquidity requirement for banks, on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of central bank reserves. We identify these effects using variation in LCR...

Using an exogenous reduction in margin requirements, this paper shows that funding liquidity causally affects market liquidity. On July 14, 2005 the Securities and Exchange Commission approved a pilot program that permitted portfolio margining of index options but not equity options. The...

In this paper, I evaluate a potential cost of large-scale asset programs, also known as quantitative easing (QE). Specifically, I assess the effect of ongoing Federal Reserve mortgage-backed security (MBS) purchases on liquidity conditions in the MBS market. Considering several indicators of...

This paper studies the effect of stock liquidity on blockholder governance. Conditional upon acquiring a stake, liquidity reduces the likelihood that a blockholder governs through voice (intervention) – as shown by the greater propensity to file Schedule 13Gs (passive investment) than 13Ds...

We examine whether institutional investors with different investment horizons exert different influences on a stock's liquidity effects. Our findings show that stocks increased by short-term institutions become more liquid while stocks increased by long-term institutions become less liquid....

The well-known positive relationship between the unemployment benefit level and unemployment duration can be separated into two potential sources; a moral hazard effect, and a liquidity effect pertaining to the increased ability to smooth consumption. The latter is a socially optimal response...

We examine whether economic downturns are beneficial to health outcomes of newborn infants in developed countries. For this we use merged populationwide registers on health and economic and demographic variables, including the national medical birth register and intergenerational link registers...

The recent global financial crisis reignited concerns over systemic risk in the financial industry as a new type of systemic risk emerged – the severe loss of asset value due to illiquidity. The crisis has sparked a large body of research and has led to a number of new quantitative indicators...

We use a model in which media of exchange are essential to examine the role of liquidity and monetary policy on production and investment decisions in which time is an important element. Specifically, we consider the effects of monetary policy on the length of production time and entry and exit...

We study the effect of market liquidity on equity-collateralized funding, accounting for endogeneity. Theory suggests market liquidity can affect funding liquidity in stabilizing and destabilizing manners. Using a new proxy for equity-collateralized funding liquidity of S&P 500 stocks over the...

This paper proposes a novel mechanism by which changes in the distribution of money holdings have real effects. Specifically, I develop a flexible-price model of segmented asset markets that generates real aggregate effects of monetary policy through the dependence of optimal markups on the...

This article analyzes the behavioral effects of unemployment benefits (UB) and it characterizes their optimal level when jobless people only survive if they have access to a minimum or subsistence consumption level in each period. To survive when the level of UB is very low, they carry out a...

The effect of the high/low liquidity in the market on the asset price forecasting is studied by deriving a system of ordinary differential equations. The model is an extension of that introduced by Caginalp and Merdan for the system involving a single asset traded by heterogenous groups....

We estimate the effects of the liquidity coverage ratio (LCR), a liquidity requirement for banks, on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of bank reserves. We identify these effects using variation in LCR...