The nineteenth-century economist Walter Bagehot maintained that in order to prevent bank panics, a central bank should provide liquidity at a very high rate of interest. However, most of the theoretical literature on liquidity provision suggests that central banks should lend at an interest rate...

The Eurosystem and the U.S. Federal Reserve System follow quite different approaches to the execution of monetary policy. The former institution adopts a hands-off approach that largely delegates to depository institutions the task of stabilizing their own liquidity at high frequency. The latter...

The econometrics literature contains a variety of two-sided tests for unknown breakpoints in time-series models with one or more parameters. This paper derives an analogous one-sided test that takes into account the direction of the change for a single parameter. In particular, we propose a sup...

This paper explores liquidity movements in stock and Treasury bond markets over a period of more than 1800 trading days. Cross-market dynamics in liquidity are documented by estimating a vector autoregressive model for liquidity (that is, bid-ask spreads and depth), returns, volatility, and...

This paper details the microfoundations of the model presented in Staff Report no. 234, “Great Expectations and the End of the Depression.” It defines the Markov perfect equilibrium formally in the nonlinear model, discusses in some detail the approximation method used and the order of...

This paper argues that the U.S. economy’s recovery from the Great Depression was driven by a shift in expectations brought about by the policy actions of President Franklin Delano Roosevelt. On the monetary policy side, Roosevelt abolished the gold standard and—even more...

This paper analyzes the impact of unanticipated changes in the federal funds rate target on equity prices, with the aim of both estimating the size of the typical reaction and understanding the reasons for the market's response. We find that over the June 1989-December 2002 sample period, a...

Although currency invoicing in international trade transactions is central to the transmission of monetary policy, the forces motivating the choice of currency have long been debated. We introduce a model wherein agents involved in international trade can invoice in the exporter's currency, the...

We provide a tractable model to study monetary policy under discretion. We restrict our analysis to Markov equilibria. We find that for all parametrizations with an equilibrium inflation rate of about 2 percent, there is a second equilibrium with an inflation rate just above 10 percent. Thus,...

Recent vector autoregression (VAR) studies have shown that monetary policy shocks have had a reduced effect on the economy since the beginning of the 1980s. This paper investigates the causes of this change. First, we estimate an identified VAR over the pre- and post-1980 periods, and...