A Financial Stress Index for a Small Open Economy: The Australian Case
with Pedro Gomis-Porqueras (Queensland University of Technology), Xiaoyang Li (Deakin University) and Xuan Zhou (Reserve Bank of Australia)
International Journal of Central Banking, Volume 21, Issue 4, 2025.
We construct a financial stress index for a small open economy, Australia, which aims to provide clear and timely signals of financial market strains. Decomposing the Australian Financial Stress Index (AFSI) into foreign and domestic components, we show that foreign factors can explain about two thirds of our index. Moreover, we find that the AFSI contains relevant and useful macroeconomic information. In particular, we find that the AFSI Granger-causes subsequent credit supply and unemployment growth. When compared with the Asian Development Bank’s Australian financial stress index, we find that our measure can better capture stress episodes that affect credit provided by banks and other types of financial intermediaries. Finally, we estimate the effect of a financial stress shock, as measured by an increase in the AFSI, on the macro observables. A financial stress shock triggers an initial increase in both money supply growth and bank loan growth, followed by a notable decline to negative growth, before eventually stabilizing. Yet, in times of heightened levels and volatility of financial stress, the downturns in bank loan growth and retail sales growth are both more profound and prolonged.
On the Negatives of Negative Interest Rates
with Aleksander Berentsen (University of Basel and FRB of St. Louis) and Hugo van Buggenum (ETH Zürich)
European Economic Review, Volume 178, 2025, 105100.
Major European central banks and the Bank of Japan have remunerated reserves at negative rates (NIR) for almost a decade, justifying a theoretical study on the long-run effects of NIR. We do so through the lens of a dynamic general equilibrium model with commercial banks that fund investments by creating retail deposits, which must be backed by reserves. Because depositors can use zero-interest cash as an alternative store of value, the effect of permanent rate cuts qualitatively changes once in NIR territory. Particularly, rate cuts reduce welfare, investment, output, and bank profit, and increase the nominal price level. These effects are attenuated once in NIR territory due to a lack of transmission to depositors. NIR does, however, give rise to an overinvestment distortion.
Stop Believing in Reserves
with Sriya Anbil (Federal Reserve Board), Alyssa Anderson (Federal Reserve Board) and Ethan Cohen (University of Minnesota, Federal Reserve Bank of Minneapolis)
R&R at the Journal of Finance
We present a new channel of quantitative tightening (QT): the supply of money held by non-banks. Calibrating a structural model to the current monetary tightening cycle, we show that this new channel of QT implies a larger Federal Reserve balance sheet with more short-term liquidity provision than a balance sheet that considers only bank reserve demand. We argue that ignoring the supply of money held by non-banks could lead to loss of interest rate control by the Federal Reserve.
The Effects of CBDC on the Federal Reserve's Balance Sheet
with Christopher Gust (Federal Reserve Board) and Kyungmin Kim (Federal Reserve Board)
Finance and Economics Discussion Series 2023-068. Washington: Board of Governors of the Federal Reserve System https://doi.org/10.17016/FEDS.2023.068
We propose a parsimonious framework to understand how the issuance of central bank digital currency (CBDC) might affect the financial system, the Federal Reserve’s balance sheet, and the implementation of monetary policy. We show that there is a wide range of outcomes on the financial system and the Federal Reserve’s balance sheet that could reasonably occur following CBDC issuance. Our analysis highlights that the potential effects on the financial sector depend critically on how the Fed manages its balance sheet. In particular, CBDC could in principle put substantial upward pressure on the spread of the federal funds rate and other wholesale funding rates over the interest rate on reserves unless the Fed expanded its balance sheet to accommodate CBDC issuance.
Payment Stablecoins and Cross Border Payments: Benefits and Implications for Monetary Policy Implementation
with Kyungmin Kim (Federal Reserve Board) and Mary-Frances Styczynski (Federal Reserve Board)
Rethinking Stigma at the Discount Window: A Model of Liquidity-Dependent Borrowing Behavior
with Sriya Anbil (Federal Reserve Board) and Mark Carlson (Federal Reserve Board)
Backing Digital Currency: The Effect of Stablecoin Growth on Treasury Bill Demand
with Todd Keister (Federal Reserve Bank of New York) and Kyungmin Kim (Federal Reserve Board)