Economic Commentary
Providing you with in-depth analysis of current economic and financial issues.
2010
- Not Your Father’s Recovery?
- There has been much talk about a disappointing recovery in the wake of the Great Recession—that this time it is much slower. Comparing features of this recovery to past recoveries casts some doubt on that view. The comparison is made using a scaled-down version of the sophisticated and powerful models that real forecasters actually use. Applying it to real GDP growth, unemployment, inflation, and the federal funds rate suggests that the recovery looks consistent with past recoveries—at least so far. Read more (PDF)
- Unemployment after the Recession: A New Natural Rate?
- The past recession has hit the labor market especially hard, and economists are wondering whether some fundamentals of the market have changed because of that blow. Many are suggesting that the natural rate of long-term unemployment—the level of unemployment an economy can’t go below—has shifted permanently higher. We use a new measure that is based on the rates at which workers are finding and losing jobs and which provides a more accurate assessment of the natural rate. We find that the natural rate of unemployment has indeed shifted higher—but much less so than has been suggested. Surprising trends in both the job-finding and job-separation rates explain much about the current state of the unemployment rate. Read more (PDF)
- Is U.S. Federal Debt Too Large?
- U.S. federal debt has grown to levels that have not been seen since the aftermath of the Second World War. Many economists argue there is plenty to be worried about when it comes to what this implies for the U.S. economy. This Economic Commentary explains that recent increases in debt are typical of the growth seen historically in times of crisis, but entitlement growth is a different story. Unchecked, it will impair our ability to respond to crises and economic downturns in the future. Read more (PDF)
- 2010-9
- Stripdowns and Bankruptcy: Lessons from Agricultural Bankruptcy Reform
- One type of financial reform being proposed to deal with the aftermath of the housing crisis is allowing bankruptcy judges the authority to modify residential mortgages in a way referred to as a stripdown. The reform is seen by some as a partial solution to the rise in foreclosures and as a Pandora’s box by others. But the debate is not new one. The 1980s farm foreclosure crisis sparked similar proposals and concerns. Congress decided to enact legislation that contained a stripdown provision, resulting in the creation of Chapter 12 in the bankruptcy code. The effects of Chapter 12 stripdown authority after its enactment shed light on the efficacy of allowing bankruptcy judges similar authority for housing loans. Read more (PDF)
- 2010-8
- W(h)ither the Fed’s Balance Sheet?
- The Federal Reserve balance sheet’s size and composition have changed dramatically since September 2008. Federal Reserve policymakers have expressed their support for eventually shrinking the Fed’s balance sheet and returning the composition of its securities portfolio to include only U.S. Treasury issues. Through the careful study of public Federal Open Market Committee documents, this Economic Commentary concisely explains some of the FOMC’s decisions concerning an appropriate sequence of policy actions. Read more (PDF)
- 2010-7
- Is Debt Overhang Causing Firms to Underinvest?
- Many economists have suggested that the weakness of corporate balance sheets is constraining business spending and investment, and that this in turn is impeding growth and the recovery. High levels of debt can depress spending and investment through several channels. This Commentary explains one of them—debt overhang can cause firms to underinvest—and points to ways in which this effect might be inhibiting the recovery. Read more (PDF)
- 2010-6
- Reforming the Over-the-Counter Derivatives Market: What’s to Be Gained?
- While derivative financial instruments have made the hedging and exchange of risk more efficient, the recent crisis showed that they also pose a substantial threat to financial stability in times of systemic turmoil. Underlying much of this threat is the lack of transparent reporting in the over-the-counter market for these instruments. This Commentary discusses the advantages of one solution to the transparency proble: moving the settlement or trading of derivatives to exchanges or clearinghouses. Read more (PDF)
- 2010-5
- Inflation: Noise, Risk, and Expectations
- The most frequently cited measures of inflation expectations, from TIPS-derived indicators to survey-based estimates like Blue Chip forecasts, have some inherent limitations when it comes to applying them to questions of monetary policy. Recently, researchers developed a model that takes information from a number of sources and produces estimates of inflation expectations that are superior to these popular measures in a number of respects. This Commentary explains how these estimates are better and what they imply for current monetary policy. Read more (PDF)
- 2010-4
- Monetary Policy in a World with Interest on Reserves
- Banks have long been required to hold reserves equal to a percentage of their net transactions accounts (checkable deposits, for example), but until recently, they earned no interest on those reserves. The Fed now pays interest on required and excess reserve balances, having been granted the authority by Congress and putting the policy into place ahead of schedule so that it could be used to help address the financial crisis. The policy will be particularly useful when it is time to start tightening policy and unwind the Fed’s balance sheet. Read more (PDF)
- 2010-3
- The Foreign Savings Glut: Inordinate Savers or Thriving Traders?
- In the years prior to our recent economic crisis, foreign savings poured into the United States. Did foreign traders who happened to acquire dollars from American trade deficits merely choose to keep these funds in dollar-denominated assets? Or, did foreigners decide to increase their savings inordinately and place those funds in dollar-denominated assets? The answer is key to the debate about the sources of liquidity that paved the way to our recent economic problems. Read more (PDF)
- 2010-2
- Are Some Prices in the CPI More Forward Looking than Others? We Think So.
- Some of the items that make up the Consumer Price Index change prices frequently, while others are slow to change. We explore whether these two sets of prices—sticky and flexible—provide insight on different aspects of the inflation process. We find that sticky prices appear to incorporate expectations about future inflation to a greater degree than prices that change on a frequent basis, while flexible prices respond more powerfully to economic conditions—economic slack. Importantly, our sticky-price measure seems to contain a component of inflation expectations, and that component may be useful when trying to gauge where inflation is heading. Read more (PDF)
- 2010-1
- Are Jobless Recoveries the New Norm?
- Recent recessions have been followed by exceptionally slow recoveries in the labor market, and the current recession is shaping up to follow the same pattern. We take a close look at some labor market measures and uncover a difference between these recent recessions and those that preceded them—workers are staying unemployed longer. This difference is a clue we can use to predict how the current labor market recovery might proceed in the near future. Read more (PDF)