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A probability-based stress test of Federal Reserve assets and income

Author

Listed:
  • Christensen, Jens H.E.
  • Lopez, Jose A.
  • Rudebusch, Glenn D.

Abstract

To support the economic recovery, the Federal Reserve amassed a large portfolio of long-term bonds. We assess the Fed׳s associated interest rate risk—including potential losses to its Treasury and mortgage-backed securities holdings and declines in the Fed׳s remittances to the Treasury. In assessing this interest rate risk, we use probabilities of alternative interest rate scenarios that are obtained from a dynamic term structure model that respects the zero lower bound on yields. The resulting probability-based stress tests indicate that large portfolio losses or a cessation of remittances to the Treasury are unlikely to occur over the next few years.

Suggested Citation

  • Christensen, Jens H.E. & Lopez, Jose A. & Rudebusch, Glenn D., 2015. "A probability-based stress test of Federal Reserve assets and income," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 26-43.
  • Handle: RePEc:eee:moneco:v:73:y:2015:i:c:p:26-43
    DOI: 10.1016/j.jmoneco.2015.03.007
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 1-19.
    2. repec:cbi:qtbart:y:2017:m:07:p:48-62 is not listed on IDEAS
    3. Robert E. Hall & Ricardo Reis, 2015. "Maintaining Central-Bank Financial Stability under New-Style Central Banking," NBER Working Papers 21173, National Bureau of Economic Research, Inc.
    4. Christensen, Jens H. E. & Krogstrup, Signe, 2016. "A Portfolio Model of Quantitative Easing," Working Paper Series 2016-12, Federal Reserve Bank of San Francisco, revised 23 Aug 2017.
    5. Jane Ihrig & Elizabeth Klee & Canlin Li & Min Wei & Joe Kachovec, 2018. "Expectations about the Federal Reserve’s Balance Sheet and the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 341-391, March.
    6. R.J. Galema & S. Lugo, 2017. "When central banks buy corporate bonds: : Target selection and impact of the European Corporate Sector Purchase Program," Working Papers 17-16, Utrecht School of Economics.
    7. Keister, Todd & Martin, Antoine & McAndrews, James J., 2015. "Floor systems and the Friedman rule: the fiscal arithmetic of open market operations," Staff Reports 754, Federal Reserve Bank of New York.
    8. Jörg Bibow, 2018. "Unconventional monetary policies and central bank profits," IMK Studies 62-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    9. repec:cbi:qtbart:y:2017:m:07:p:79-94 is not listed on IDEAS
    10. Christensen, Jens H. E. & Rudebusch, Glenn D., 2017. "A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt," Working Paper Series 2017-7, Federal Reserve Bank of San Francisco.
    11. De Genaro, Alan, 2016. "Systematic multi-period stress scenarios with an application to CCP risk management," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 119-134.
    12. Joerg Bibow, 2018. "Unconventional Monetary Policies and Central Bank Profits: Seigniorage as Fiscal Revenue in the Aftermath of the Global Financial Crisis," Economics Working Paper Archive wp_916, Levy Economics Institute.
    13. Christiaan Pattipeilohy, 2016. "A comparative analysis of developments in central bank balance sheet composition," DNB Working Papers 510, Netherlands Central Bank, Research Department.
    14. Abdymomunov, Azamat & Gerlach, Jeffrey, 2014. "Stress testing interest rate risk exposure," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 287-301.
    15. repec:eee:econom:v:201:y:2017:i:2:p:333-347 is not listed on IDEAS
    16. repec:cbi:qtbart:y:2017:m:07:p:63-78 is not listed on IDEAS

    More about this item

    Keywords

    Term structure modeling; Zero lower bound; Monetary policy; Quantitative easing;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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