Pacific Basin Notes

Price Stability Built to Last

2024 – 05

| February 20, 2024

The economy is healthy and price stability is within sight. But progress is not victory, and considerable uncertainty and risks remain. To finish the job will take fortitude and patience, along with the agility to respond as the economy evolves. The following is adapted from the keynote address by the president of the Federal Reserve Bank of San Francisco at the 40th Annual NABE Economic Policy Conference in Washington, DC, on February 16.

The Long-Run Fiscal Outlook in the United States

2024 – 04

| February 12, 2024

The federal debt as a share of U.S. GDP is nearing its historical high from World War II. This ratio fell sharply over the three decades after World War II due to a primary surplus, rapid economic growth, and low interest rates. Projections for the coming three decades point to a persistent primary deficit without major reforms to mandatory spending programs or higher taxes. Thus, the rates of interest and economic growth will be crucial for determining the long-run debt-to-GDP ratio’s evolution.

Why Is Prime-Age Labor Force Participation So High?

2024 – 03

| February 5, 2024

The labor force participation (LFP) rate for prime-age workers surged from early 2021 through early 2023, especially for women. This helped reduce the large shortfall of available workers relative to available jobs that emerged during the recovery from the pandemic. Analysis of state labor markets indicates that the cyclical response of prime-age LFP was much more pronounced during the two most recent business cycles than in prior ones. This state-level relationship weakened in 2023, however, suggesting that the cyclical gains in prime-age LFP are winding down.

Does Working from Home Boost Productivity Growth?

2024 – 02

| January 16, 2024

An enduring consequence of the COVID-19 pandemic is a notable shift toward remote and hybrid work. This has raised questions regarding whether the shift had a significant effect on the growth rate of U.S. productivity. Analyzing the relationship between GDP per hour growth and the ability to telework across industries shows that industries that are more adaptable to remote work did not experience a bigger decline or boost in productivity growth since 2020 than less adaptable industries. Thus, teleworking most likely has neither substantially held back nor boosted productivity growth.

Extreme Weather and Financial Market Uncertainty

2024 – 01

| January 8, 2024

Extreme weather can have negative, minimal, or even positive effects on business performance—creating significant uncertainty about outcomes for those businesses. Financial markets show heightened uncertainty among investors for companies that have been hit by hurricanes. This uncertainty persists for several months after a hurricane’s landfall, as reflected by continued discussion of hurricanes in analyst calls. Comparing expected volatility to actual volatility shows that markets have underreacted to the uncertainty caused by hurricanes. After Hurricane Sandy, a particularly salient hurricane for investors, this market underreaction appears to have diminished.

From Hiring Difficulties to Labor Hoarding?

2023 – 32

| December 18, 2023

Businesses faced challenges finding enough workers to fill job openings early in the pandemic recovery. One view suggests that, as economic growth moderated relative to the strong bounceback in economic activity in the early pandemic recovery period, some businesses started hoarding labor to avoid the potential difficulty of recruiting workers in the future. Evidence from Okun’s law—which theorizes that economic output tends to fall as unemployment rises—is consistent with this view. The results suggest that businesses partly adjusted production by changing the number of hours for current workers rather than varying employee numbers.

Do Banks Lend to Distressed Firms?

2023 – 31

| November 27, 2023

Concerns emerged during the COVID-19 pandemic over banks continuing to lend to unproductive businesses that were close to default. Recent research shows that lenders have incentives to offer relatively better terms to less-productive and more-indebted firms to recover their prior investments. U.S. loan-level data confirm the empirical relevance of such lending behavior. A rich model of firms and banks further emphasizes that this type of lending can also depress overall productivity by sustaining firms that should otherwise exit the economy.

What the Moment Demands

2023 – 30

| November 20, 2023

When central banks are unsure about how the economy will evolve, what impact their policies will have, or how fundamental benchmarks in the economy are changing, the optimal strategy is a gradualist approach to policy. The challenge will be to respond rapidly when the situation requires and to resist the pressure to act quickly when patience is needed. The following is adapted from the closing keynote by the president of the Federal Reserve Bank of San Francisco to the 33rd Frankfurt European Banking Congress in Frankfurt, Germany, on November 17.

Recent and Near-Term Fiscal Policy: Headwind or Tailwind?

2023 – 29

| November 13, 2023

The federal government routinely uses government spending and taxes to help offset the highs and lows of the U.S. business cycle. While government spending typically increases during a recession, the magnitude of the fiscal expansion during the pandemic recession was outsized compared with the average historical pattern. This likely contributed to real economic growth and possibly inflation during the recovery. Over the next few years, U.S. fiscal policy is expected to be roughly neutral, providing neither a tailwind nor headwind to the overall economy.

Global Market Discipline during Recent Policy Tightening

2023 – 28

| November 6, 2023

Financial market discipline, in the form of movements in yields charged on sovereign debt of emerging economies, during the 2021 onset of U.S. monetary policy tightening depended heavily on domestic economic conditions. This pattern matches yield movements during the 2013 taper tantrum. The pattern suggests that, while advanced economy policies can influence emerging market financial conditions, domestic policies such as government spending levels are also important. However, the differing responses for pandemic-related spending versus the overall current account suggest that markets distinguished between needed COVID-19 fiscal support and other spending.

The Bell Curve of Global CO2 Emission Intensity

2023 – 27

Zoë Arnaut, Òscar Jordà, and Fernanda Nechio | October 16, 2023

Countries’ commitments to reduce carbon dioxide (CO2) emissions can have important implications for their economies. Data since the 1800s reveal that the amount of CO2 emissions generated for a given level of output follows a bell-shaped curve. Pairing this with projections of future economic growth can help in predicting future overall emissions. Comparing actual data with past projections for levels of emission intensity reveals that reductions have been slower than predicted over the past 40 years. This divergence highlights the challenges many countries may face in reaching their emissions targets.

Men’s Falling Labor Force Participation across Generations

2023 – 26

Leila Bengali, Evgeniya A. Duzhak, and Cindy Zhao | October 10, 2023

The labor force participation rate for prime-age men has been declining for decades. About 14% of millennial males at age 25 are not in the labor force, compared with 7% of baby boomer males when they were that age. This generational gap declines substantially as groups approach middle age; the decline reflects that younger millennials enrolled in postsecondary education at higher rates and moved into the workforce later than prior generations. The convergence for millennial males suggests that the trend of men’s higher nonparticipation rates may slow in the future.

How Much Do Work Interruptions Reduce Mothers’ Wages?

2023 – 25

Na’ama Shenhav | October 2, 2023

Women experience large and persistent declines in earnings after having children, which in part reflects fewer hours worked while children are young. Recent studies of large policy-induced changes in mothers’ work experience in the 1990s quantify the impact of avoiding lengthy work interruptions after childbirth. The analysis shows that mothers who return to work a year sooner after childbirth earn 5-6% higher wages 10 to 20 years later. Thus, policies that encourage mothers’ return to work can lead to large improvements in their lifetime earnings.

Inflation Expectations, the Phillips Curve, and Stock Prices

2023 – 24

| September 25, 2023

During the 1970s and early 1980s, rises in inflation tended to coincide with weaker economic activity and lower stock prices. But in more recent decades, rises in inflation have tended to coincide with stronger economic activity and higher stock prices. The emergence of a pattern where inflation, economic activity, and stock prices all move together over the business cycle can be traced to the beneficial effects of well-anchored inflation expectations.

Does Monetary Policy Have Long-Run Effects?

2023 – 23

Òscar Jordà, Sanjay R. Singh, and Alan M. Taylor | September 5, 2023

Monetary policy is often regarded as having only temporary effects on the economy, moderating the expansions and contractions that make up the business cycle. However, it is possible for monetary policy to affect an economy’s long-run trajectory. Analyzing cross-country data for a set of large national economies since 1900 suggests that tight monetary policy can reduce potential output even after a decade. By contrast, loose monetary policy does not appear to raise long-run potential. Such effects may be important for assessing the preferred stance of monetary policy.

Falling College Wage Premiums by Race and Ethnicity

2023 – 22

Leila Bengali, Marcus Sander, Robert G. Valletta, and Cindy Zhao | August 28, 2023

Workers with a college degree typically earn substantially more than workers with less education. This so-called college wage premium increased for several decades, but it has been flat to down in recent years and declined notably since the pandemic. Analysis indicates that this reflects an acceleration of wage gains for high school graduates rather than a slowdown for college graduates. This pattern is most evident for workers in racial and ethnic groups other than White, possibly reflecting an unusually tight labor market that may have altered their college attendance decisions.

The Evolution of Disagreement in the Dot Plot

2023 – 21

Andrew Foerster and Zinnia Martinez | August 21, 2023

The Summary of Economic Projections offers important insights into the views of Federal Open Market Committee participants. The summary’s “dot plot” charts each participant’s assessment of the appropriate path for monetary policy given their economic outlook. A new index measuring the level of disagreement indicated by the dots shows that disagreement fell during the 2010s expansion, was nearly nonexistent early in the pandemic, and has been increasing recently. Policy disagreement is correlated with disagreement about future inflation, but factors unrelated to disagreement about the outlook also play a large role.

How Far Is Labor Force Participation from Its Trend?

2023 – 20

Andreas Hornstein, Marianna Kudlyak, Brigid Meisenbacher, and David A. Ramachandran | August 14, 2023

Labor force participation in the United States has dropped a percentage point since the pandemic began. Analyzing how participation has evolved for various groups of the population suggests that more than two-thirds of this decline has been due to persistent “trend” factors. The remainder is due to temporary economic conditions, or “cyclical” factors. Estimates project that trend factors—driven largely by population aging—could push labor participation down an additional percentage point over the next decade.

Where Is Shelter Inflation Headed?

2023 – 19

Augustus Kmetz, Schuyler Louie, and John Mondragon | August 7, 2023

Shelter inflation has remained high even as other components of inflation have fallen. However, various market indicators, including house prices and rents, suggest that the housing market has slowed significantly with the rise in interest rates. Forecasting models that combine several measures of local shelter and rent inflation can help explain how recent trends might affect the path of future shelter inflation. The models indicate that shelter inflation is likely to slow significantly over the next 18 months, consistent with the evolving effects of interest rate hikes on housing markets.

Will a Cooler Labor Market Slow Supercore Inflation?

2023 – 18

Sylvain Leduc, Daniel J. Wilson, and Cindy Zhao | July 12, 2023

Given steady declines in price inflation for core goods and expectations that rent inflation will moderate over time, the outlook for nonhousing core services—or “supercore”—inflation has grown in importance. State-level data document a typically weak relationship between this indicator and unemployment rates, highlighting the stickiness of supercore inflation. The data show that its sensitivity to labor markets strengthened early in the pandemic recovery in connection with strong demand for service workers. However, it’s uncertain whether this sensitivity will remain heightened or return to its persistent pre-pandemic weakness.

Reducing Inflation along a Nonlinear Phillips Curve

2023 – 17

| July 10, 2023

Inflation has climbed since 2021, as the labor market has tightened. Two historical data relationships can account for elevated inflation over the past two years: the Beveridge curve, which relates job vacancies and unemployment rates over the business cycle, and a nonlinear version of the Phillips curve, which links inflation to labor market slack. Combining estimates of the two curves implies that inflation can fall in conjunction with a “soft landing” for the economy if labor market easing is achieved mainly by reducing job vacancies rather than increasing unemployment.

Why Immigration Is an Urban Phenomenon

2023 – 16

Joan Monras | July 3, 2023

Immigration is fundamentally an urban phenomenon. Both in the United States and elsewhere, immigrants settle primarily in cities—especially high-wage, high cost-of-living cities. The most likely reason is that immigrants often send a significant share of their income back to their origin country. As a result, they value a city’s high wages and are less discouraged by the high living costs than native-born workers. Migration policies can reinforce this urban concentration pattern.

How Long Do Rising Temperatures Affect Economic Growth?

2023 – 15

Gregory Casey, Stephie Fried, and Ethan Goode | June 26, 2023

How might rising temperatures around the world affect the growth rate of GDP per person? Examining data across countries over the past half-century shows that a change in temperature affects GDP growth, but only temporarily. Combining estimates from past data with a simple growth model can help project the impacts of future higher temperatures on GDP per person by country. These projections suggest that total global losses in output per person could be substantial, though smaller than if a given change in temperature had a permanent effect on GDP growth.

Global Supply Chain Pressures and U.S. Inflation

2023 – 14

Zheng Liu and Thuy Lan Nguyen | June 20, 2023

Global supply chain disruptions following the onset of the COVID-19 pandemic contributed to the rapid rise in U.S. inflation over the past two years. Evidence suggests that supply chain pressures pushed up the cost of inputs for goods production and the public’s expectations of higher future prices. These factors accounted for about 60% of the surge in U.S. inflation beginning in early 2021. Supply chain pressures began easing substantially in mid-2022, contributing to the slowdown in inflation.

How Much Do Labor Costs Drive Inflation?

2023 – 13

Adam Hale Shapiro | May 30, 2023

Tight labor markets have raised concerns about the role of labor costs in persistently high inflation readings. Policymakers are paying particular attention to nonhousing services inflation, which is considered most closely linked to wages. Analysis shows that higher labor costs are passed along to customers in the form of higher nonhousing services prices, however the effect on overall inflation is very small. Labor-cost growth has no meaningful effect on goods or housing services inflation. Overall, labor-cost growth is responsible for only about 0.1 percentage point of recent core PCE inflation.

The Choice to See

2023 – 12

Mary C. Daly | May 22, 2023

Public service is not a job. It’s a choice to see people clearly and to act on what you see. This is the message of the following commencement speech delivered on May 12 by the president and CEO of the Federal Reserve Bank of San Francisco to the Sol Price School of Public Policy, University of Southern California, Los Angeles.

The Rise and Fall of Pandemic Excess Savings

2023 – 11

Hamza Abdelrahman and Luiz E. Oliveira | May 8, 2023

U.S. households built up savings at unprecedented rates following the strong fiscal response and lower consumer spending related to the pandemic. Despite recent rapid drawdowns of those funds, estimates suggest a substantial stock of excess savings remains in the aggregate economy. Since 2020, households across all income levels have held a historically large share of savings in cash or other easily accessible forms. Estimates suggest that those funds could be available to support personal spending at least into the fourth quarter of 2023.

Small Business Lending and the Paycheck Protection Program

2023 – 10

Jack Mueller and Mark M. Spiegel | April 10, 2023

The Paycheck Protection Program (PPP) and the PPP Liquidity Facility were launched early in the pandemic to help many small businesses survive. These programs encouraged banks to lend more extensively to small businesses over the first half of 2020. Since then, however, banks have reduced their exposure to these loans, leaving no significant changes in small business lending associated with participation in these programs over the three-year period from 2020 through 2022. This raises some doubt that emergency lending programs encourage long-term relationships that outlast the programs.

House Prices Respond Promptly to Monetary Policy Surprises

2023 – 09

Denis Gorea, Augustus Kmetz, Oleksiy Kryvtsov, Marianna Kudlyak, and Mitchell Ochse | March 27, 2023

New evidence based on listings of homes for sale from 2000 to 2019 suggests house prices adjust to monetary policy changes over weeks rather than years, faster than previously thought. Housing list prices fall within two weeks after the Federal Reserve announces an unexpected policy tightening, similar to responses of other financial assets. House prices respond more strongly to unexpected changes in long-term interest rates than to surprises in the short-term federal funds rate. Changes in mortgage rates following Fed announcements are key to explaining this rapid house price reaction.

Forward-Looking Policy in a Real-Time World

2023 – 08

Mary C. Daly | March 9, 2023

Restoring price stability is a key part of the Fed’s mandate, and it is what the American people expect. Achieving it will take time and a broad view of economic conditions. Policymakers have to respond to an economy that is evolving in real time and prepare for what the economy will look like in the future. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to Griswold Center for Economic Policy Studies at Princeton University on March 4.

Age Discrimination and Age Stereotypes in Job Ads

2023 – 07

Ian Burn, Daniel Firoozi, Daniel Ladd, and David Neumark | March 6, 2023

Studies suggest that employers discriminate against older workers in hiring, responding less favorably to equally qualified job applicants who are older. Employers may also limit hiring of older workers by including age stereotypes in job ads that signal a preference for younger workers. Evidence from an experimental study shows that older workers are less likely to apply to job advertisements that contain language with ageist stereotypes. The results indicate that this impact is comparable to the direct effects of employer age discrimination in hiring decisions.

The Role of Immigration in U.S. Labor Market Tightness

2023 – 06

Evgeniya A. Duzhak | February 27, 2023

Immigrants contribute a large portion of the growth in the U.S. population and labor force. However, immigration flows into the United States slowed significantly following immigration policy changes from 2017 to 2020 and the onset of the COVID-19 pandemic. Analysis of state-level data shows that this migration slowdown tightened local labor markets modestly, raising the ratio of job vacancies to unemployed workers 5.5 percentage points between 2017 and 2021. More recent data show immigration has rebounded strongly, helping to close the shortfall in foreign-born labor and ease tight labor markets.

Evaluating Monetary Policy with Inflation Bands and Horizons

2023 – 05

Troy Davig and Andrew Foerster | February 21, 2023

Inflation targeting has become the dominant way countries approach setting monetary policy goals. However, central banks differ in how they conduct that policy and how they evaluate their success in meeting a stated inflation goal. A new assessment method combines a percentage range around a target, known as an inflation tolerance band, with central banks stating how long it will take for high or low inflation to return to that range, known as a time horizon. Comparing previously projected horizons with realized horizons can be used to evaluate policy success.

Can Monetary Policy Tame Rent Inflation?

2023 – 04

Zheng Liu and Mollie Pepper | February 13, 2023

Rent inflation has surged since early 2021. Because the cost of housing is an important component of total U.S. consumer spending, high rent inflation has contributed to elevated levels of overall inflation. Evidence suggests that, as monetary policy tightening cools housing markets, it can also reduce rent inflation, although this tends to adjust relatively slowly. A policy tightening equivalent to a 1 percentage point increase in the federal funds rate could reduce rent inflation as much as 3.2 percentage points over 2½ years.

Financial Market Conditions during Monetary Tightening

2023 – 03

Simon H. Kwan and Louis Liu | February 6, 2023

The current round of federal funds rate increases is expected to reverse a historically large gap between the real funds rate and the neutral rate at the beginning of the tightening cycle. Financial markets have reacted faster and more strongly than in past monetary tightening cycles, in part because of this large gap and the Federal Reserve’s forward guidance. Historical experiences suggest financial conditions could tighten even more given the size of the gap.

Supply Chain Disruptions, Trade Costs, and Labor Markets

2023 – 02

Andrés Rodríguez-Clare, Mauricio Ulate, and Jose P. Vasquez | January 19, 2023

Global supply chain disruptions due to the COVID-19 pandemic have increased the costs of trade between countries. Given the interconnectedness of the U.S. economy with the rest of the world, higher trade costs can have important impacts on U.S. labor markets. A model of the U.S. economy that incorporates variation in industry concentrations across regions can help quantify these effects. The analysis suggests that recent global supply disruptions could cause a sizable and persistent reduction in labor force participation.

Are Inflation Expectations Well Anchored in Mexico?

2023 – 01

Remy Beauregard, Jens H.E. Christensen, Eric Fischer, and Simon Zhu | January 17, 2023

Price inflation has increased sharply since early 2021 in many countries, including Mexico. If sustained, high inflation in Mexico could raise questions about the ability of its central bank to bring inflation down to its 3% inflation target. However, analyzing the difference between market prices of nominal and inflation-indexed government bonds suggests investors’ long-term inflation expectations in Mexico are close to the central bank’s inflation target and are projected to remain so in coming years.

Recession Prediction on the Clock

2022 – 36

Thomas M. Mertens | December 27, 2022

The jobless unemployment rate is a reliable predictor of recessions, almost always showing a turning point shortly before recessions but not at other times. Its success in predicting recessions is on par with the better-known slope of the yield curve but at a shorter horizon. Hence, it performs better for predicting recessions in the near term. Currently, this data and related series analyzed using the same method are not signaling that a recession is imminent, although that may change in coming months.

When the Fed Raises Rates, Are Banks Less Profitable?

2022 – 35

Pascal Paul | December 20, 2022

Banks limit their interest rate risk exposure by issuing adjustable-rate loans and protect their funding costs by slowly adjusting deposit rates. These actions allow banks to maintain largely stable profit margins even if monetary policy tightens unexpectedly. Evidence from the pre-pandemic tightening cycle suggests that bank profit margins could increase rather than decline over the coming months. However, the slow adjustment of rates that banks pay on deposits may result in people moving their savings, leading to a reallocation of assets away from the regulated banking system.

Oil Shocks when Interest Rates Are at the Zero Lower Bound

2022 – 34

Wataru Miyamoto, Thuy Lan Nguyen, and Dmitry Sergeyev | November 30, 2022

New evidence suggests that rising oil prices associated with declining oil supply slow economic activities less when interest rates are constrained at the zero lower bound. Moreover, these oil price spikes can even increase overall output. Evidence points to the following explanation. An oil supply shock raises inflation in all periods, but the nominal interest rate does not react under the zero lower bound, so the shock reduces the real interest rate, stimulating demand in the economy.

Resolute and Mindful: The Path to Price Stability

2022 – 33

Mary C. Daly | November 28, 2022

As monetary policymakers work to deliver low and stable prices and an economy that works for all, they will need to be resolute and mindful. This means moving firmly toward our goal, while constantly calibrating our stance of policy so that we go far enough to get the job done, but not so far that we overdo it. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Orange County Business Council in Irvine, California, on November 21.

Passing Along Housing Wealth from Parents to Children

2022 – 32

Matteo Benetton, Marianna Kudlyak, Louis Liu, John Mondragon, and Mitchell Ochse | November 21, 2022

Young adults are more likely to own a home if their parents are homeowners than if their parents are renters. New research reveals how parents owning a home can lead to an increase in the persistence in homeownership across generations. Specifically, homeowner parents are often able to extract the equity value from their home to help their children purchase a home. This “dynastic” home equity enables children of homeowner parents who extract equity to accumulate approximately one third more housing wealth by age 30 than children of renters.

Can the News Drive Inflation Expectations?

2022 – 31

Augustus Kmetz, Adam H. Shapiro, and Daniel J. Wilson | November 14, 2022

How households expect inflation to evolve plays an important role in explaining overall inflation dynamics. Household expectations rose dramatically over the past year or so, much faster than professional forecasters’ inflation expectations. News coverage can explain part of this growing gap. Analyzing the volume and sentiment of daily news articles on inflation suggests that one-fourth of the increased gap between household and professional expectations can be attributed to heightened negative media coverage. These results highlight the important impact of the content and tone of economic information on the real economy.

Monetary Policy Stance Is Tighter than Federal Funds Rate

2022 – 30

Jason Choi, Taeyoung Doh, Andrew Foerster, and Zinnia Martinez | November 7, 2022

The Federal Reserve’s use of forward guidance and balance sheet policy means that monetary policy consists of more than changing the federal funds rate target. A proxy federal funds rate that incorporates data from financial markets can help assess the broader stance of monetary policy. This proxy measure shows that, since late 2021, monetary policy has been substantially tighter than the federal funds rate indicates. Tightening financial conditions are similar to what would be expected if the funds rate had exceeded 5¼% by September 2022.

Comparing Measures of Housing Inflation

2022 – 29

Leila Bengali | October 17, 2022

Measuring the price of shelter for homeowners is difficult, even when housing markets are stable. A new measure of shelter price inflation uses mortgage, tax, and insurance payments, rather than the implied rental value of homes used in the consumer price index (CPI). The payments method suggests year-over-year shelter price inflation rose 4.3% nationally in July, compared with the CPI’s 5.8% estimate. Conditions in rental markets likely explain this difference. Comparing the varying results nationally and across regions highlights the challenge of accurately measuring the shelter inflation that homeowners face.

What If? Monetary Policy in Hindsight

2022 – 28

Regis Barnichon | October 11, 2022

If the Federal Reserve had expected the upcoming inflation surge back in March 2021, would it have acted differently? A new method to tackle such “what if” questions suggests that it may have been preferable to only moderately raise the federal funds rate during 2021, even with perfect foresight. In that case, inflation would have been about 1 percentage point lower as of June 2022, while unemployment would be about 2 percentage points higher. This result reflects the importance of the Fed’s dual mandate of price stability and maximum employment.

The Singularity of the Dual Mandate

2022 – 27

Mary C. Daly | October 3, 2022

Economic security depends on both jobs and stable prices. Together, these two congressionally mandated goals constitute the Fed’s dual mandate. This mandate is not a choice between two desirable things. It is a balance meant to deliver on a singular goal—a sustainable and expanding economy that works for everyone. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco at Boise State University on September 29.

Remote Work and Housing Demand

2022 – 26

Augustus Kmetz, John Mondragon, and Johannes Wieland | September 26, 2022

The COVID-19 pandemic reshaped the way households work. Nearly a third of employees still worked from home part time or full time as of August 2022. This has significantly increased housing demand and is a key factor explaining why U.S. house prices grew 24% between November 2019 and November 2021. Analysis shows that the shift to remote work may account for more than half of overall house price increases and similar increases in rents. This fundamental evolution in work-related housing demand may be important for future house prices.

Wage Growth When Inflation Is High

2022 – 25

Òscar Jordà, Celeste Liu, Fernanda Nechio, and Fabián Rivera-Reyes | September 6, 2022

In a tight labor market, workers are able to respond to price increases by bargaining for higher wages. Analyzing conditions since the pandemic shows that, in the recent environment of elevated inflation and low unemployment, wages have become much more sensitive to expected price inflation than in the past. The impact of inflation expectations on wages also appears to have become longer lasting.

Finding a Soft Landing along the Beveridge Curve

2022 – 24

Brandyn Bok, Nicolas Petrosky-Nadeau, Robert G. Valletta, and Mary Yilma | August 29, 2022

As U.S. economic growth slows this year, a key question is whether job openings can fall from historical highs without a substantial rise in unemployment. Analyzing the current Beveridge curve relationship between unemployment and job openings presents a meaningful possibility that labor market pressures can ease and achieve a “soft landing” with only a limited increase in unemployment. This view is supported by high rates of job matching in the U.S. labor market in 2022, despite ongoing employment reallocation across industries.

The Impact of Weather on Retail Sales

2022 – 23

Brigitte Roth Tran | August 22, 2022

Variation in weather could cause greater disruptions to a range of economic outcomes as severe weather events become more frequent or more extreme. Analyzing daily sales at a national apparel and sporting goods brand’s stores reveals that weather effects on store sales are surprisingly persistent, even after accounting for shoppers simply changing when and where they make their purchases. Moreover, sales at stores that have more experience with adverse weather events have a lower response, suggesting that adaptation may reduce the negative impact of increasingly severe weather on sales.

Two Years into COVID, What’s the State of U.S. Businesses?

2022 – 22

Pascal Paul | August 15, 2022

More than two years after the outbreak of COVID-19, concerns remain that U.S. businesses are substantially more vulnerable and less productive than in the past. Using extensive data on private and public firms allows for a detailed assessment of these concerns. According to a number of performance measures, businesses borrowing from large U.S. banks appear relatively healthy, increased leverage is concentrated among safer companies rather than riskier ones, and probabilities of default are close to pre-crisis levels.

Will Workers Demand Cost-of-Living Adjustments?

2022 – 21

Reuven Glick, Sylvain Leduc, and Mollie Pepper | August 8, 2022

Households are currently expecting inflation to run high in the short run but to remain muted over the more distant future. Given this divergence, what role do short-run and long-run household inflation expectations play in determining what workers expect for future wages? Data show that wage inflation is sensitive to movements in household short-run inflation expectations but not to those over longer horizons. This points to an upside risk for inflation, as workers negotiate higher wages that businesses could pass on to consumers by raising prices.

COVID-19 Fiscal Expansion and Inflation Expectations in Japan

2022 – 20

Jens H.E. Christensen and Mark M. Spiegel | August 3, 2022

The Japanese government’s strong response to the economic fallout from COVID-19 presents an opportunity to examine whether expansionary fiscal policies raise long-term inflation expectations. Analyzing market-based estimates of long-term inflation expectations in Japan shows that announcements of government fiscal stimulus under COVID-19 had no meaningful impact on investors’ long-term inflation expectations. This illustrates the challenge of moving long-term expectations after they become anchored below a central bank’s inflation target, as they have been in Japan.

The Unequal Effect of Interest Rates by Race, Gender

2022 – 19

Aina Puig | August 1, 2022

Household spending typically falls as interest rates rise, but the responses vary by race and gender. Data show that households with mortgages headed by white women cut their spending on durable goods about a quarter percentage point in the three years following a 1 percentage point increase in interest rates. This is a much larger reduction than for households with mortgages headed by white men or Black men or women. The differences highlight the challenge of understanding how policy interest rate changes affect a diverse population.

The Increase in Inflation Compensation: What’s Up?

2022 – 18

Jens H.E. Christensen | July 5, 2022

Supply and demand imbalances associated with the COVID-19 pandemic have contributed to a sharp increase in price inflation since early 2021. In response, market-based measures of short-term inflation compensation have risen sharply in the United States. Survey-based measures suggest that this has not affected longer-term inflation expectations. However, analyzing the difference between market prices of standard and inflation-indexed government bonds provides tentative indications that investors have raised their 10-year inflation expectations since spring 2021 to levels above their historical range.

Policy Nimbleness Through Forward Guidance

2022 – 17

Mary C. Daly | June 28, 2022

Bringing inflation down is the Federal Reserve’s number one priority. The goal is to do that without crippling growth and stalling the labor market. This will not be easy, but the economy and the Fed’s policy toolkit have both evolved, which will help for meeting those goals. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco at the Shadow Open Market Committee Conference held at Chapman University in Orange, CA, on June 24.

Credit Conditions in the Pandemic Mortgage Market

2022 – 16

John Mondragon | June 27, 2022

The recent rapid rise in house prices has raised some questions about the potential risk to broader financial stability. However, credit quality in the mortgage market appears to be very high, and lending standards tightened in early 2020. While low interest rates increased the demand for refinancing, evidence from large nonconforming loans shows that credit supply contracted sharply in March 2020 and remained tight through the early pandemic period. The shift in credit supply suggests that lenders adjusted their standards to mitigate some risk in the housing market.

How Much Do Supply and Demand Drive Inflation?

2022 – 15

Adam Hale Shapiro | June 21, 2022

Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.

Estimating Natural Rates of Unemployment

2022 – 14

Brandyn Bok and Nicolas Petrosky-Nadeau | May 31, 2022

Before the pandemic, the U.S. unemployment rate reached a historic low that was close to estimates of its underlying longer-run value and the short-run level associated with an absence of inflationary pressures. After two turbulent years, unemployment has returned to its pre-pandemic low, and the estimated underlying longer-run unemployment rate appears largely unchanged. However, economic disruptions appear to have pushed up the short-run noninflationary rate substantially, as high as 6%. Examining these different measures of the natural rate of unemployment can provide useful insights for policymakers.

Untangling Persistent versus Transitory Shocks to Inflation

2022 – 13

Kevin J. Lansing | May 23, 2022

How much persistent versus transitory forces contribute to inflation influences the Federal Reserve’s ability to achieve its goal of 2% average inflation over time. If elevated inflation is driven mainly by persistent shocks, then a stronger and longer-lasting policy response is likely to be needed to bring inflation back down. Recent data show that consecutive changes in monthly inflation rates have tended to move increasingly in the same direction. This pattern suggests that the contribution of persistent shocks to inflation has been rising since mid-2019.

Pandemic Unemployment Effects across Demographic Groups

2022 – 12

Evgeniya A. Duzhak | May 16, 2022

Workers in service industries and occupations with a lot of close social contact suffered the highest job losses during the pandemic recession. This differed from previous downturns, which tended to have their most severe effects on industries with high concentrations of manual labor. As a result, the unemployment impact of the pandemic on different demographic groups has not followed historical patterns, particularly for Asian, Black, and female workers. The unemployment gap between these racial groups has not been as wide as previous economic fluctuations would have predicted.

Current Recession Risk According to the Yield Curve

2022 – 11

Michael D. Bauer and Thomas M. Mertens | May 9, 2022

The slope of the Treasury yield curve is a popular recession predictor with an excellent track record. The two most common alternative measures of the slope typically move together but have diverged recently, making the resulting recession signals unclear. Economic arguments and empirical evidence, including its more accurate predictions, favor the difference between 10-year and 3-month Treasury securities. Recession probabilities for the next year derived from this spread so far remain modest.

Steering Toward Sustainable Growth

2022 – 10

Mary C. Daly | April 22, 2022

The inflation outlook combined with a strong labor market leave no doubt that further monetary policy tightening is appropriate. The question is, how much and how quickly? The appropriate path of policy confronts the economic headwinds immediately ahead while also laying the groundwork for the economy we want in the future. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Center for Business and Economic Research, at the University of Nevada, Las Vegas, on April 20.

Unemployment Insurance Withdrawal

2022 – 09

Sarah Albert, Olivia Lofton, Nicolas Petrosky-Nadeau, and Robert G. Valletta | April 11, 2022

Unemployment insurance benefits were expanded substantially to help overcome the pandemic labor market shock in early 2020. However, improved labor market conditions in early 2021 prompted many states to withdraw from the enhanced unemployment benefits programs several months before the federal program was scheduled to end in early September. A comparison of states that ended enhanced benefits early with those that maintained them suggests that the withdrawal is associated with a small pickup in employer hiring, consistent with prior studies that found the unemployment benefit expansions had modest effects.

“Great Resignations” Are Common During Fast Recoveries

2022 – 08

Bart Hobijn | April 4, 2022

The record percentage of workers who are quitting their jobs, known as the “Great Resignation,” is not a shift in worker attitudes in the wake of the pandemic. Evidence on which workers are quitting suggests that it reflects the strong rebound of the demand for younger and less-educated workers. Historical data on quits in manufacturing suggest that the current wave is not unusual. Waves of job quits have occurred during all fast recoveries in the postwar period.

Why Is U.S. Inflation Higher than in Other Countries?

2022 – 07

Òscar Jordà, Celeste Liu, Fernanda Nechio, and Fabián Rivera-Reyes | March 28, 2022

Inflation rates in the United States and other developed economies have closely tracked each other historically. Problems with global supply chains and changes in spending patterns due to the COVID-19 pandemic have pushed up inflation worldwide. However, since the first half of 2021, U.S. inflation has increasingly outpaced inflation in other developed countries. Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021.

How Are Businesses Responding to Climate Risk?

2022 – 06

Hishgee Jargalsaikhan, Sylvain Leduc, and Luiz E. Oliveira | March 21, 2022

Understanding what kinds of climate-related risks businesses could face is part of the Federal Reserve’s work to support a thriving economy and well-functioning financial system. To advance these goals, the San Francisco Fed surveyed businesses in its nine-state region to learn how they perceive and approach climate risk. Findings show that businesses view a changing climate as a moderate risk to their activities, particularly through possible regulation changes, higher input costs, and variations in demand. Many businesses are adopting formal risk mitigation strategies, including monitoring climate-risk exposure and reducing carbon dependence.

This Time Is Different…Because We Are

2022 – 05

Mary C. Daly | February 28, 2022

The Federal Reserve has evolved since the “Great Inflation” of the 1970s. With new tools and a deeper understanding of the importance of transparency, it is better prepared to meet the dual mandate goals of price stability and full employment, even in challenging times. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Los Angeles World Affairs Council & Town Hall on February 23.

What’s the Best Measure of Economic Slack?

2022 – 04

Regis Barnichon and Adam Hale Shapiro | February 22, 2022

Different ways of measuring the economy’s unused capacity, or slack, can result in varying inflation forecasts. Estimates suggest that direct measures of labor market tightness, such as the ratio of job vacancies to unemployment or the rate of employee job switching, provide more accurate forecasts than commonly used measures, such as the unemployment rate or the output gap. Recent elevated values of these measures of labor market tightness suggest greater inflation pressure than is implied by the unemployment rate alone.

Will Rising Rents Push Up Future Inflation?

2022 – 03

Kevin J. Lansing, Luiz E. Oliveira, and Adam Hale Shapiro | February 14, 2022

Rising rents account for a significant portion of recent inflation. Estimates of how rent inflation typically responds to two leading indicators—current asking rents and current house prices—can help forecast the path of overall inflation for the next two years. This method predicts that higher rent inflation could add about 0.5 percentage point to personal consumption expenditures price inflation for both 2022 and 2023. These potential additions are important in light of the Federal Reserve’s 2% inflation target.

Searching for Maximum Employment

2022 – 02

Sarah Albert and Robert G. Valletta | February 7, 2022

How well the economy is progressing toward the Federal Reserve’s goal of maximum employment is reflected in a range of indicators that evolve over time. Beyond the unemployment rate, two key metrics of labor market health are the labor force participation rate and the employment-to-population ratio. The aging of the population is reducing the levels of both measures, implying that they are unlikely to return to pre-pandemic highs. However, these two indicators remain well below their demographic trends, and analysis suggests that they will not recover to trend until 2024.

Average Inflation Targeting in the Financial Crisis Recovery

2022 – 01

Vasco Cúrdia | January 10, 2022

The Federal Reserve adopted average inflation targeting as part of its long-run monetary strategy framework in 2020. This strategy allows inflation to rise and fall such that it averages 2% over time. Analysis shows that a version of average inflation targeting that is partly forward-looking—that is, one that responds in part to expected future inflation—could have improved economic outcomes in the recovery from the financial crisis of 2008, as well as substantially reduced the uncertainty around economic outcomes.

Comparing Pandemic Unemployment to Past U.S. Recoveries

2021 – 33

Robert E. Hall and Marianna Kudlyak | November 29, 2021

Unemployment fell at a slow and steady rate in the 10 cyclical recoveries from 1949 through 2019. These historical patterns also apply to the recovery from the pandemic recession after accounting for the unprecedented burst of temporary layoffs early in the pandemic followed by their rapid reversal from April to November 2020. Unemployment for other reasons—which has been most important in other recent recoveries—did not start declining until November 2020. Since then, unemployment for other reasons has declined at a faster pace than its historical average.

Employment Effects of COVID-19 across States, Sectors

2021 – 32

Sarah Albert, Andrew Foerster, and Pierre-Daniel G. Sarte | November 22, 2021

The COVID-19 pandemic generated sharp losses in employment in early 2020, followed by a partial but incomplete recovery that continues to this day. The effects on employment in business sectors that produce goods and those that provide services varied substantially across states. This was the case during both the initial drop and the subsequent recovery. The extent of the cross-state variation and how the variation has evolved over time has been unlike any past recessions, making the pandemic recession and recovery unprecedented in both its severity and its uneven impact.

Policymaking in a Time of Uncertainty

2021 – 31

Mary C. Daly | November 19, 2021

The impact of COVID and its ongoing threat continue to disrupt and delay the full recovery of the economy. It is tempting to act now, believing that what we see today are clear signals. However, acting without clarity is risky. In the face of unprecedented uncertainty caused by the long tail of the pandemic, the best policy is recognizing the need to wait. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to The Commonwealth Club of California on November 16.

How Strongly Are Local Economies Tied to COVID-19?

2021 – 30

Samuel R. Tarasewicz and Daniel J. Wilson | November 15, 2021

The relationship between economic activity and local COVID-19 conditions—infections and deaths—has changed over time. While activity was strongly tied to local virus conditions during the first six to nine months of the pandemic, they decoupled in late 2020 through the first half of 2021. This link strengthened again in the third quarter of 2021, particularly for highly vaccinated counties. One possible interpretation of this restrengthening is that areas with high vaccination rates have heightened virus risk aversion and hence high sensitivity to changes in local virus conditions.

What Would It Cost to Issue 50-year Treasury Bonds?

2021 – 29

Jens H.E. Christensen, Jose A. Lopez, and Paul L. Mussche | November 8, 2021

The longest-term U.S. Treasury bonds that investors can buy mature in 30 years. Some other countries offer up to 50-year government bonds. Examining these foreign bond markets and extrapolating U.S. Treasury yields to evaluate such longer-term options suggests that the extra costs of introducing 50-year bonds relative to conventional 30-year bonds are likely to be small on average. Because the U.S. fiscal deficit remains substantial, such longer-term debt instruments could provide an attractive opportunity to finance the growing debt in a sustainable way.

Climate Change Costs Rise as Interest Rates Fall

2021 – 28

Michael D. Bauer and Glenn D. Rudebusch | October 20, 2021

Climate change—including higher temperatures and more extreme weather—is already causing economic damage and is projected to have further long-lasting effects. To properly assess the potential future economic losses from climate change, they must be discounted to produce comparable values in today’s dollars. The discount rates required for this assessment are influenced by the long-run equilibrium real interest rate, which has declined notably since the 1990s. Accounting for a persistently lower real rate increases the present discounted future costs of climate change, which is relevant for climate policy choices.

Is the American Rescue Plan Taking Us Back to the ’60s?

2021 – 27

Regis Barnichon, Luiz E. Oliveira, and Adam H. Shapiro | October 18, 2021

The American Rescue Plan provided fiscal support during a strong economic rebound, raising concerns about the risk of fueling inflation. One way to assess this risk of economic overheating uses the ratio of job vacancies to unemployment, which measures labor market slack more accurately and, hence, can predict future inflation better than the unemployment rate alone. Estimates suggest that the fiscal plan acts to temporarily raise the vacancy-to- unemployment ratio, in turn pushing up inflation by about 0.3 percentage point per year through 2022.

From Gaps to Growth: Equity as a Path to Prosperity

2021 – 26

Mary C. Daly | October 4, 2021

The pandemic has shined a vivid light on the deep roots of economic inequity, showing that the rules are not the same for everyone. Persistent, unfair gaps in opportunity and well-being across different groups in our society limit people’s potential. Eliminating these inequities could substantially boost GDP and increase the economy’s long-run rate of growth, leading to greater prosperity for all. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the UCLA Anderson Forecast Webinar on September 29.

How Do Business Cycles Affect Worker Groups Differently?

2021 – 25

Evgeniya A. Duzhak | September 7, 2021

Racial disparities in socioeconomic outcomes for the U.S. population are often masked by aggregate statistics. Unemployment rates vary significantly across groups according to gender and race or ethnicity and have different sensitivities to the business cycle. Focusing on jobless rates by demographic groups shows that Black and Hispanic workers, particularly men, are the most sensitive to periods of economic growth and decline. This higher sensitivity persists across individuals with the same education level. Occupation plays a role in explaining the relative cyclical differences in unemployment rates across demographic groups.

Effects of Asset Valuations on U.S. Wealth Distribution

2021 – 24

Renuka Diwan, Evgeniya A. Duzhak, and Thomas M. Mertens | August 30, 2021

Net household wealth is highly unequal across U.S. households, and the types of assets people hold tend to change according to their position along the distribution of wealth. The pattern of household portfolios shows that the top 1% of households hold most of their wealth in stocks, while home values are most important for the wealth of the bottom half of the distribution. Higher growth in equity values relative to real estate values therefore tends to widen the wealth distribution, as experienced during the coronavirus pandemic.

How Do Low and Negative Interest Rates Affect Banks?

2021 – 23

Mauricio Ulate and Olivia Lofton | August 23, 2021

Developed countries have recently turned to very low—even negative—interest rates to try to stimulate their economies. Low or negative rates can affect banks in novel ways because they often base their retail rates on the policy rate. In particular, the rate banks pay households for deposits usually remains at zero during times of low or negative policy rates, rather than falling together with the policy rate, as it would during normal times. This can decrease banks’ net interest margins, negatively impacting their profitability, equity, and ability to lend.

Labor Productivity in a Pandemic

2021 – 22

John Fernald, Huiyu Li, and Mitchell Ochse | August 16, 2021

U.S. labor productivity has grown quickly during the pandemic compared with the past decade. However, this rapid pace is unlikely to be sustained. Similar to the Great Recession, the primary reasons for strong productivity growth now are cyclical effects that are likely to unwind as the economy continues to recover. For example, the number of workers has fallen, so capital per worker has risen—raising labor productivity in the short term. What effect the pandemic itself might have on productivity remains uncertain.

Return of the Original Phillips Curve

2021 – 21

Peter Lihn Jørgensen and Kevin J. Lansing | August 9, 2021

The link between changes in U.S. inflation and the output gap has weakened in recent decades. Over the same time, a positive link between the level of inflation and the output gap has emerged, reminiscent of the original 1958 version of the Phillips curve. This development is important because it indicates that structural changes in the economy have not eliminated the inflationary pressure of gap variables. Improved anchoring of people’s expectations for inflation, which makes the expected inflation term in the Phillips curve more stable, can account for both observations.

Minority Banks during the COVID-19 Pandemic

2021 – 20

Sophia Friesenhahn and Simon Kwan | August 2, 2021

The COVID-19 pandemic disproportionately affected the health and financial well-being of communities of color. Over the past year, minority banks that specialize in providing financial services to underserved communities and minority borrowers have also performed significantly worse than other banks of similar size. Minority banks projected higher loan losses and had lower profits than nonminority banks. To the extent that underperforming minority banks may be more reluctant to expand lending—whether to avoid risk or minimize regulatory scrutiny—it could further exacerbate the unevenness of the recovery.

Do Households Expect Inflation When Commodities Surge?

2021 – 19

Reuven Glick, Noah Kouchekinia, Sylvain Leduc, and Zheng Liu | July 12, 2021

Household surveys indicate that consumers expect higher inflation this year than in recent years, as the U.S. economy rebounds from the deep recession. This has coincided with a surge in commodity prices, as strong demand for goods like gas, food, and construction materials is catching producers with low supplies. Evidence suggests that households respond to commodity price increases by raising their expectations of future inflation. However, since surges in commodity prices are transitory, their effects on inflation expectations—particularly long-term expectations—are modest and short-lived.

How Much Did the CARES Act Help Households Stay Afloat?

2021 – 18

James Aylward, Elizabeth Laderman, Luiz E. Oliveira, and Gladys Teng | July 6, 2021

Widespread job losses starting in mid-March last year forced many households to rely more heavily on nonemployment income and liquid assets on hand to continue buying what they needed. Federal assistance through the Coronavirus Aid, Relief, and Economic Security Act helped boost household resilience—the ability to sustain consumption despite the loss of employment income. Data suggest that the aid increased household resilience by 15 weeks, chiefly through enhanced unemployment insurance benefits. Among racial groups, this benefited Black and Hispanic households the most, raising median household resilience by 19 weeks.

Climate Risk and the Fed: Preparing for an Uncertain Certainty

2021 – 17

Mary C. Daly | June 28, 2021

While the severity and scope of a changing climate remains unclear, the consensus is that it poses a significant risk to the global economy and financial system. As monetary policymakers, the Fed’s job is to navigate this uncertainty by anticipating the potential changes and understanding their implications. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Peterson Institute for International Economics on June 22.

The Economy’s Response to Potential Climate Policy

2021 – 16

Stephie Fried, Kevin Novan, and William B. Peterman | June 21, 2021

Uncertainty about U.S. climate policy in the future creates risk that affects the investment decisions businesses make today. If firms expect future policy to raise the cost of carbon emissions, then they could react to this by both shifting investment towards cleaner capital and reducing overall investment. These two responses lead to lower emissions, even if no actual climate policy is in place. Evidence suggests that this risk encourages companies to voluntarily reduce emissions using internal carbon prices and other mechanisms.

The Divergent Signals about Labor Market Slack

2021 – 15

Troy Gilchrist and Bart Hobijn | June 1, 2021

A broad dashboard of indicators is sending mixed signals about the state of the labor market. Some indicators have deviated widely from their normal historical relationships since the onset of COVID-19. Because of the uneven economic impact of the pandemic, the labor force participation rate, payroll employment, and the share of job losers among the unemployed have provided more reliable signals about overall conditions than other components of the dashboard. They suggest that labor slack is higher than implied by the current headline unemployment rate.

Fiscal Multiplier at the Zero Bound: Evidence from Japan

2021 – 14

Ethan Goode, Zheng Liu, and Thuy Lan Nguyen | May 24, 2021

The United States has implemented large-scale fiscal policy measures to help households and businesses cushion the economic fallout from the COVID-19 pandemic and to strengthen the recovery. The Federal Reserve has also supported the economy by keeping its policy rate at the zero lower bound. Evidence from Japan suggests that, in a sustained zero-bound environment, an unexpected increase in government spending has much larger and more persistent effects on real GDP, and even more so when the economy is in a recession.

Exploring the Safety Premium of Safe Assets

2021 – 13

Jens H.E. Christensen and Nikola Mirkov | May 10, 2021

Investors are usually willing to pay a higher price, known as a premium, for a safe fixed-income asset in return for the convenience of its high quality and liquidity. A study of Swiss government bonds—widely considered to be extremely safe but not particularly liquid—can give some insights into how quality affects the premium. The large and variable safety premium of these bonds surged to persistently higher levels following the launch of the euro. However, subsequent large asset purchases by the European Central Bank depressed the safety premium.

The Last Resort in a Changing Landscape

2021 – 12

Mary C. Daly | May 3, 2021

As lender of last resort, the Federal Reserve plays a vital role in maintaining a sound and stable financial system. But the frequency and scale of Fed interventions following disruptions like the Global Financial Crisis and COVID-19 are concerning. As the country emerges from the pandemic, it’s time to focus on crafting more resilient policies, particularly by addressing Treasury market vulnerabilities and providing greater prudential oversight. The following is adapted from remarks by the president of the Federal Reserve Bank of San Francisco to the Money Marketeers on April 15.

Where Is the U.S. COVID-19 Pandemic Headed?

2021 – 11

Daniel J. Wilson | April 12, 2021

Consumer spending and business operations across the United States have been highly dependent on local conditions related to the COVID-19 pandemic. Current economic forecasts therefore must incorporate projections for where the pandemic is headed. A new econometric model provides county-level and national forecasts of COVID-19 infections. Estimates from the model indicate that population immunity acquired from prior infections is the primary driver of recent declines in new cases. This factor should continue to exert strong downward pressure on new cases in the weeks ahead.

Parental Participation in a Pandemic Labor Market

2021 – 10

Olivia Lofton, Nicolas Petrosky-Nadeau, and Lily Seitelman | April 5, 2021

Gender gaps in labor market outcomes during the pandemic largely reflect differences in parents’ experiences. Labor force participation fell much less for fathers compared with other men and all women at the onset of the pandemic; the recovery has been more pronounced for men and women without children. Meanwhile, labor force participation among mothers declined with the start of the school year. Evidence suggests flexibility in setting work schedules can offset some of the adverse impact on mothers’ employment, while the ability to work from home does not.

Capital Flow Surges and Rising Income Inequality

2021 – 09

Renuka Diwan, Zheng Liu, and Mark M. Spiegel | March 29, 2021

Surges of foreign investment into developing countries can amplify economic stress and potentially undermine their financial stability. New evidence suggests that excessive foreign capital inflows can also increase income inequality in emerging economies. Research shows that, as low global interest rates trigger more investment, those inflow surges benefit entrepreneurs by raising their returns, while lowering household earnings on bank deposits within the countries. The potential impact on income inequality provides another reason beyond financial stability for resisting abrupt surges in capital inflows.

Disagreement about U.S. and Euro-Area Inflation Forecasts

2021 – 08

Reuven Glick and Noah Kouchekinia | March 22, 2021

Disagreement among economic forecasters about the outlook for inflation in both the United States and the euro area has increased since the onset of the pandemic. The nature of these forecast differences can provide insights into the inflation risks that lie ahead. Many forecasters initially expected substantially lower inflation over the next year but subsequently raised their expectations as economic activity began to improve. In contrast, changes in expectations and disagreement about longer-term inflation have been relatively subdued and suggest a balanced likelihood between higher and lower inflation.

Lessons from History, Policy for Today

2021 – 07

Mary C. Daly | March 4, 2021

Today’s economic challenges are different from the past, and it’s important to learn from history to achieve a better economic future for everyone. As the economy recovers from the effects of COVID-19, the Fed’s new policy framework retains vigilance against inflation while committing to not pull back the reins on the economy in response to a strong labor market. The following is adapted from a virtual webinar by the president and CEO of the Federal Reserve Bank of San Francisco to the Economic Club of New York on March 2.

Resilience of Community Banks in the Time of COVID-19

2021 – 06

Simon Kwan | March 1, 2021

Stress tests in December 2020 showed that the largest U.S. banks had strong capital levels and could continue to lend to households and businesses under hypothetical severe recessions. Assessing thousands of small community banks against similar criteria suggests that, while about one-fifth could fall below adequate capitalization, only a handful of those risk becoming insolvent. Overall, this is a reassuring view for small banks and their communities, suggesting that the risk of widespread bank failures leading to financial instability appears to be small.

Contrasting U.S. and European Job Markets during COVID-19

2021 – 05

Jean-Benoît Eyméoud, Nicolas Petrosky-Nadeau, Raül Santaeulàlia-Llopis, and Etienne Wasmer | February 22, 2021

The onset of the COVID-19 pandemic and the unprecedented slowing of economic activity that followed caused severe disruptions to labor markets around the globe. In contrast to the United States, European Union countries funded short-time work programs to maintain jobs during a period of lockdown that was expected to be transitory. This succeeded in avoiding sharp increases in unemployment early in the recession. However, if the pandemic leads to a permanent reallocation of economic activity, short-time work programs may slow the process of workers moving from shrinking to growing sectors of the economy.

Future Output Loss from COVID-Induced School Closures

2021 – 04

John Fernald, Huiyu Li, and Mitchell Ochse | February 16, 2021

The COVID-19 pandemic has caused massive disruptions to the U.S. educational system. Research on school closures—particularly combined with parental income loss—implies that children are likely to attain lower levels of lifetime education compared with pre-pandemic trends. Projections show learning disruptions could lower the level of annual economic output ¼ percentage point on average over the next 70 years. The effect is small the first 5–10 years then peaks at a loss of ½ percentage point in about 25 years, when the children reach prime working age.

Climate Change Is a Source of Financial Risk

2021 – 03

Glenn D. Rudebusch | February 8, 2021

The ongoing trend of climate change—including higher temperatures and more extreme weather—will result in economic and financial losses for many businesses, households, and governments. Moreover, the uncertainty about the severity and timing of these losses is a source of financial risk. Recently, the Federal Reserve joined other financial regulators to warn that such climate-related financial risk may threaten the safety and soundness of individual financial institutions and the stability of the overall financial system.

Can Government Spending Help to Escape Recessions?

2021 – 02

Regis Barnichon, Davide Debortoli, and Christian Matthes | February 1, 2021

A key to designing fiscal policy is understanding how government purchases affect economic output overall. Research suggests that expanding government spending is not very effective at stimulating an economy in normal times. However, in deep downturns when monetary policy is constrained at the zero lower bound, public spending is more potent and can become an effective way to escape a recession.

The Asymmetric Costs of Misperceiving R-star

2021 – 01

Andrea Ajello, Isabel Cairó, Vasco Cúrdia, and Albert Queralto | January 11, 2021

The natural rate of interest, or r-star, is used to evaluate whether monetary policy is restrictive or supportive of economic activity. However, this benchmark rate can only be estimated, and policymakers’ misperceptions of the level of the natural rate can carry substantial economic costs in terms of unemployment and inflation. A scenario using mistaken perceptions shows that the costs of overestimating the natural rate are greater than the cost of underestimating it if policy space is limited by the effective lower bound on the nominal federal funds rate.

2020 Lessons, 2021 Priorities

2020 – 37

Mary C. Daly | December 3, 2020

What lessons should we take from a difficult year—and what should our priorities be for 2021? Overcoming the harsh and uneven economic impacts of COVID-19 and returning to full employment and sustainable 2% inflation will be the Federal Reserve’s chief concerns. But success will require us to have confidence in the power of our tools. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Arizona State University Economic Forecast Luncheon on December 1.

Permanent and Transitory Effects of the 2008–09 Recession

2020 – 36

Andrew Foerster and Lily M. Seitelman | November 30, 2020

Separating U.S. economic output into permanent and transitory components can help explain the effects of recessions and expansions. GDP growth shifted to a lower trend rate in 2000, indicating a slowdown long before the 2008–09 recession. GDP was substantially above trend before that recession; it then declined significantly and did not recover to its trend rate until 2017. The recession resulted in permanent losses to GDP. Without those permanent effects, GDP at the end of the latest expansion would have been about $380 billion or $1,460 per person higher.

Small Business Lending during COVID-19

2020 – 35

Remy Beauregard, Jose A. Lopez, and Mark M. Spiegel | November 23, 2020

Small businesses and farms were hit hard by restrictions that limited their ability to pay operating costs during the COVID-19 crisis. Banks played an important supportive role, substantially expanding the loans available to these firms during the early months of the crisis. The growth in lending was associated with small business participation in the Paycheck Protection Program (PPP) and bank use of the PPP Liquidity Facility. Analyzing data for the first half of 2020 suggests that these programs were successful in supporting lending growth during the crisis, particularly among small banks.

Temporary Layoffs and Unemployment in the Pandemic

2020 – 34

Erin Wolcott, Mitchell G. Ochse, Marianna Kudlyak, and Noah A. Kouchekinia | November 16, 2020

Temporary layoffs accounted for essentially the entire increase in unemployment to its historically high rate in April 2020. Although the rate has come down since its peak, unemployment remains well above pre-pandemic levels. There is little evidence that temporary layoffs are becoming permanent at a higher rate than in the past. However, the continuation of the health and economic crisis poses a risk that a growing share of unemployment will consist of people in persistent categories of joblessness, thereby slowing the overall recovery.

Sudden Stops and COVID-19: Lessons from Mexico’s History

2020 – 33

Gianluca Benigno, Andrew Foerster, Christopher Otrok, and Alessandro Rebucci | November 9, 2020

The COVID-19 pandemic produced a sharp contraction in capital flows in emerging markets during the spring of 2020. Such contractions are known as “sudden stops” and historically have been associated with significant downturns in a country’s economic activity. Evidence from Mexico’s financial crisis history suggests that sudden stops tend to exhibit a common pattern: the crisis lasts one to two years before a rapid but partial recovery, followed by years of protracted stagnation.

Is the Federal Reserve Contributing to Economic Inequality?

2020 – 32

Mary C. Daly | October 19, 2020

Not every American gets the same chance at life, liberty, and the pursuit of happiness. We have to acknowledge and confront this reality—as individuals, as institutions, and as a nation. The Fed can help create more inclusive economic success by finding full employment experientially. But achieving true equality will require commitment from all of us. The following reflects remarks delivered in a virtual presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the University of California, Irvine, on October 13.

Assessing Recent Stock Market Valuation with Macro Data

2020 – 31

Kevin J. Lansing | October 13, 2020

History suggests that elevated values of the cyclically adjusted price-earnings (CAPE) ratio may indicate an overvalued stock market. A valuation model that uses a small set of economic variables can help account for movements in the CAPE ratio over the past six decades. One of these variables is a macroeconomic uncertainty index. Comparing the model’s prediction for the second and third quarters of 2020 to the 2008–2009 period suggests that investors have reacted to macroeconomic uncertainty very differently during the COVID-19 outbreak than they did during the financial crisis.

Risk of Business Insolvency during Coronavirus Crisis

2020 – 30

Sophia M. Friesenhahn and Simon H. Kwan | October 5, 2020

Many businesses had amassed high levels of debt, or leverage, before the COVID-19 pandemic. Out of precaution or necessity, firms increased their borrowing further after the onset. Although the shock to those firms’ value significantly increased their risk, measured by their distance-to-default, the default risk remains relatively small for most corporate debt. Nevertheless, the amount of outstanding liabilities among firms with elevated risk of insolvency is more than two times higher than at the peak of the global financial crisis.

Commercial Banks under Persistent Negative Rates

2020 – 29

Remy Beauregard and Mark M. Spiegel | September 28, 2020

Do extended periods of negative policy interest rates continue to encourage commercial bank lending? A large panel of European and Japanese banks provides evidence on the impact of negative rates over different lengths of time. Analysis suggests that both bank profitability and bank lending activity erode more the longer such negative policy rates continue, primarily due to banks’ reluctance to pass negative rates along to retail depositors. This appears to negate one of the main arguments for moving policy rates below the zero bound.

Did the $600 Unemployment Supplement Discourage Work?

2020 – 28

Nicolas Petrosky-Nadeau and Robert G. Valletta | September 21, 2020

People receiving unemployment insurance benefits during the COVID-19 recession were entitled to $600 of additional payments per week through July. This large increase in benefit payments raised a concern that recipients would delay returning to work. However, analysis suggests that the available aid would not outweigh the value of a longer-term stable income in workers’ decisions to accept job offers. Evidence from recent labor market outcomes confirms that the supplemental payments had little or no adverse effect on job search.

Adjusting the Unemployment Thermometer

2020 – 27

Regis Barnichon and Winnie Yee | September 3, 2020

Stay-at-home orders issued to slow the spread of COVID-19 may have severely distorted labor market statistics, notably the official unemployment rate. A method to correct the survey biases associated with the pandemic indicates that the true unemployment rate was substantially higher than the official rate in April and May. However, the biases appeared to fade thereafter, making the drop in June even more dramatic than implied by the official data.

The Illusion of Wage Growth

2020 – 26

Erin E. Crust, Mary C. Daly, and Bart Hobijn | August 31, 2020

Despite a sharp spike in unemployment since March 2020, aggregate wage growth has accelerated. This acceleration has been almost entirely attributable to job losses among low-wage workers. Wage growth for those who remain employed has been flat. This pattern is not unique to COVID-19 but is more profound now than in previous recessions. This means that, in the wake of the virus, evaluations of the labor market must rely on a dashboard of indicators, rather than any single measure, to paint a complete picture of the losses and the recovery.

Disruptions to Starting a Business during COVID-19

2020 – 25

Huiyu Li and Mitchell G. Ochse | August 27, 2020

Applications to start new businesses tanked from mid-March through May, contracting more severely than during the 2008–2009 financial crisis. Since then, however, applications have recovered so strongly that the total number filed in 2020 should be similar to that for 2019, even if applications growth reverts to the average lows experienced during the early days of the pandemic. This should result in only a modest loss of new businesses and is not likely to cause much additional strain on overall jobs and productivity gains.

Monitoring the Inflationary Effects of COVID-19

2020 – 24

Adam Hale Shapiro | August 24, 2020

Inflation fell dramatically following the onset of the COVID-19 pandemic. Dividing the underlying price data according to spending category reveals that a majority of the drop in core personal consumption expenditures inflation comes from a large decline in consumer demand. This demand effect far outweighs upward price pressure from COVID-related supply constraints. A new monthly data page from the San Francisco Fed tracks how sensitivity to the economic disruptions of COVID-19 affects different categories of inflation over time (discontinued September 2023).

Emerging Bond Markets and COVID-19: Evidence from Mexico

2020 – 23

Jens H.E. Christensen, Eric Fischer, and Patrick J. Shultz | August 17, 2020

The pandemic caused by the coronavirus is depressing economic activity and severely straining government budgets globally. Without international support, the ability of emerging economies to weather this crisis will depend crucially on access to and the cost of borrowing in domestic government bond markets. Analyzing bond flows and risk premiums for Mexican government bonds during the pandemic gives some insights into a major emerging economy’s experience. Mexican risk premiums have increased more than 1 percentage point above predicted levels, pointing to tighter funding conditions for the Mexican government.

Average-Inflation Targeting and the Effective Lower Bound

2020 – 22

Renuka Diwan, Sylvain Leduc, and Thomas M. Mertens | August 10, 2020

In response to the COVID-19 pandemic, the Federal Reserve cut the federal funds rate to essentially zero. It took further measures to support the functioning of financial markets and the flow of credit. Nevertheless, the economic downturn is putting downward pressure on inflation, which had already been running below the Fed’s 2% target for several years. This raises additional concerns that inflation expectations could decline and push inflation down further, ultimately hampering economic activity. A monetary policy framework based on average-inflation targeting could help address these challenges.

The Highs and Lows of Productivity Growth

2020 – 21

Andrew Foerster, Christian Matthes, and Lily M. Seitelman | August 3, 2020

Productivity growth shows evidence of switching between long periods of high and low average growth. Estimates suggest that the United States has been in the low-growth regime since 2004. Assuming this low growth continues, productivity growth in the year 2025 would be 0.6%. By dropping this assumption and allowing for a switch to consistent higher growth, an alternative estimate forecasts that the distribution of possible productivity growth across quarters could average about 1.1% in 2025.

The Fog of Numbers

2020 – 20

Òscar Jordà, Noah Kouchekinia, Colton Merrill, and Tatevik Sekhposyan | July 15, 2020

In times of economic turbulence, revisions to GDP data can be sizable, which makes conducting economic policy in real time during a crisis more difficult. A simple model based on Okun’s law can help refine the advance data release of real GDP growth to provide an improved reading of economic activity in real time. Applying this to data from the Great Recession explains some of the massive GDP revisions at that time. This could provide a guide for possible revisions to GDP releases during the current coronavirus crisis.

Rising Wildfire Risk for the 12th District Economy

2020 – 19

James Aylward and Luiz E. Oliveira | July 13, 2020

The growing risk from natural disasters is a key economic effect of climate change. Severe wildfires are a leading example, and they are particularly important for the western states that make up the 12th Federal Reserve District. Analyzing data on wildfire hazard and economic activity confirms that these states are substantially more exposed to wildfire risk than the rest of the country. This gap in regional wildfire risk is likely to grow over time as climate change continues.

COVID-19 and CO2

2020 – 18

Galina Hale and Sylvain Leduc | July 6, 2020

One potential side effect from the rapid decline of global economic activity since the worldwide pandemic is a reduction in carbon dioxide emissions. Historically, CO2 emissions rise and fall in tandem with economic activity in the short run. Since the industries most affected by the downturn also produce the most CO2, emissions could drop more than output this time around. However, without substantial and sustained changes in energy sources and efficiency, the concentration of CO2 in the atmosphere—the relevant factor causing climate change—will continue on its upward trajectory.

The Unequal Impact of COVID-19: Why Education Matters

2020 – 17

Mary C. Daly, Shelby R. Buckman, and Lily M. Seitelman | June 29, 2020

Since COVID-19 hit the United States, more than 20 million American workers have become unemployed and countless others have left the labor force altogether. While the labor market disruptions have affected workers in a wide set of industries and occupations, those without a college degree have experienced the most severe impact. Addressing gaps in educational attainment will be important to creating better economic resiliency for individuals against future shocks.

Are Banks Exposed to Interest Rate Risk?

2020 – 16

Pascal Paul and Simon W. Zhu | June 22, 2020

While banks seem to face inherent risk from short-term interest rate changes, in practice they structure their balance sheets to avoid exposure to such risk. Nonetheless, recent research finds that banks cannot offload all of the interest rate risk they are naturally exposed to. Historically, banks’ profit margins reflect their compensation for taking on interest rate risk and their stock prices are highly sensitive to changes in interest rates. These findings can help practitioners assess banks’ risk exposures and may have implications for unconventional monetary policy.

We Can’t Afford Not To

2020 – 15

Mary C. Daly | June 15, 2020

Three crises—health, economic, and social—are converging into one difficult moment in American history. Everyone has been affected, but the highest costs are falling on those least prepared to bear them. The path forward will require investments in “opportunity infrastructure” that maximize individual potential, reduce inequities, and lay the foundation for long-term economic growth. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the National Press Club, Washington, DC, on Monday, June 15.

Market Assessment of COVID-19

2020 – 14

Simon H. Kwan and Thomas M. Mertens | May 28, 2020

News about the COVID-19 public health crisis has affected asset prices to varying degrees across sectors of the U.S. economy. Stocks in the utilities, real estate, and energy sectors initially suffered the worst sector-specific shocks, while the information technology, health-care, and telecommunications sectors fared relatively better. Businesses with higher financial leverage saw larger declines in their valuations. A simultaneous repricing of credit derivatives suggests concerns about insolvency contributed to the valuation declines. Although some stocks are recovering from the initial lows, significant differences across sectors remain.

The COVID-19 Fiscal Multiplier: Lessons from the Great Recession

2020 – 13

Daniel J. Wilson | May 26, 2020

The United States enacted a series of fiscal relief and stimulus bills in recent weeks, centered around the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The current fiscal response shares key similarities to the fiscal stimulus enacted during the Great Recession. Research over the past 10 years on the macroeconomic impact of that stimulus thus has important implications for the current fiscal response. The results point to a large potential impact on GDP.

An Unemployment Crisis after the Onset of COVID-19

2020 – 12

Nicolas Petrosky-Nadeau and Robert G. Valletta | May 18, 2020

The COVID-19 pandemic has upended the U.S. labor market, with massive job losses and a spike in unemployment to its highest level since the Great Depression. How long unemployment will remain at crisis levels is highly uncertain and will depend on the speed and success of coronavirus containment measures. Historical patterns of monthly flows in and out of unemployment, adjusted for unique aspects of the coronavirus economy, can help in assessing potential paths of unemployment. Unless hiring rises to unprecedented levels, unemployment could remain severely elevated well into next year.

Coronavirus and the Risk of Deflation

2020 – 11

Jens H.E. Christensen, James M. Gamble IV, and Simon Zhu | May 11, 2020

The pandemic caused by COVID-19 represents an unprecedented negative shock to the global economy that is likely to severely depress economic activity in the near term. Could the crisis also put substantial downward pressure on price inflation? One way to assess the potential risk to the inflation outlook is by analyzing prices of standard and inflation-indexed government bonds. The probability of declining price levels—or deflation—among four major countries within the next year indicates that the perceived risk remains muted, despite the recent economic turmoil.

Historical Patterns around Financial Crises

2020 – 10

Pascal Paul and Joseph H. Pedtke | May 4, 2020

Long-run historical data for advanced economies provide evidence to help policymakers understand specific conditions that typically lead up to financial crises. Recent research finds that rapid growth in the top income share and prolonged low labor productivity growth are robust predictors of crises. Moreover, if crises are preceded by these developments, then the subsequent recoveries are slower. This recent empirical evidence suggests that financial crises are not simply random events but are typically preceded by a prolonged buildup of macrofinancial imbalances.

Mitigating COVID-19 Effects with Conventional Monetary Policy

2020 – 09

Vasco Cúrdia | April 13, 2020

The Federal Reserve slashed the federal funds rate in response to the effects of the COVID-19 pandemic. The full impact of the pandemic on the economy is still uncertain and depends on many factors. Analysis suggests that allowing the federal funds rate to fall fast will help the economy cope with the aftermath of COVID-19. In particular, the limited policy space due to the effective lower bound of the federal funds rate before the pandemic reinforces rather than offsets the need for a rapid funds rate decline.

News Sentiment in the Time of COVID-19

2020 – 08

Shelby R. Buckman, Adam Hale Shapiro, Moritz Sudhof, and Daniel J. Wilson | April 6, 2020

The COVID-19 pandemic is causing severe disruptions to daily life and economic activity. Reliable assessments of the economic fallout in this rapidly evolving situation require timely data. Existing sentiment indexes are useful indicators of current and future spending but are only available with a lag or have a short history. A new Daily News Sentiment Index provides a way to measure sentiment in real time from 1980 to today. Compared with survey-based measures of consumer sentiment, this index shows an earlier and more pronounced drop in sentiment in recent weeks.

The Uncertainty Channel of the Coronavirus

2020 – 07

Sylvain Leduc and Zheng Liu | March 30, 2020

The outbreak of the novel coronavirus, or COVID-19, has severely disrupted economic activity through various supply and demand channels. The pandemic can also have pervasive economic impact by raising uncertainty. In the past, sudden and outsized spikes in uncertainty have led to large and protracted increases in unemployment and declines in inflation. These effects are similar to those resulting from declines in aggregate demand. Monetary policy accommodation, such as interest rate cuts, can help cushion the economy from such uncertainty shocks.

Why Is Unemployment Currently So Low?

2020 – 06

Marianna Kudlyak and Mitchell G. Ochse | March 2, 2020

Unemployment is at a 50-year low. The low rate is not from an unusually high job-finding rate out of unemployment but, rather, an unusually low rate at which people enter unemployment. The low entry rate reflects a long-run downward trend likely due to population aging, better job matches, and other structural factors. These developments lowered the long-run unemployment rate trend. At the end of 2019, the unemployment rate was below the trend but no more so than in previous business cycle peaks, indicating that the labor market is no tighter.

Is the Risk of the Lower Bound Reducing Inflation?

2020 – 05

Robert Amano, Thomas J. Carter, and Sylvain Leduc | February 24, 2020

U.S. inflation has remained below the Fed’s 2% goal for over 10 years, averaging about 1.5%. One contributing factor may be the impact from a higher probability of future monetary policy being constrained by the effective lower bound on interest rates. Model simulations suggest that this higher risk of hitting the lower bound may lead to lower expectations for future inflation, which in turn reduces inflation compensation for investors. The higher risk may also change household and business spending and pricing behavior. Taken together, these effects contribute to weaker inflation.

The New Stone Soup

2020 – 04

Mary C. Daly | February 18, 2020

Countries around the globe face slow growth, low real interest rates, and persistently low inflation. This makes economies less resilient and less able to offset everyday shocks with traditional tools. Policymakers must actively look for outside perspectives and be courageous enough to take action in times of uncertainty. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco delivered as part of the Iveagh House Lectures at the Irish Department of Foreign Affairs and Trade in Dublin on February 10.

Wringing the Overoptimism from FOMC Growth Forecasts

2020 – 03

Kevin J. Lansing and Winnie Yee | February 10, 2020

Growth forecasts by Federal Open Market Committee meeting participants were persistently too optimistic for 2008 through 2016. The typical forecast started out high but was revised down over time, often dramatically, as incoming data failed to meet expectations. In contrast, forecasts for 2017 through 2019 started low but were revised up over time. Cumulative forecast revisions for these years were much smaller on average than in the past. These observations suggest that participants have adjusted their forecast methodology, including lowering estimates of trend growth, to eliminate the prior optimistic bias.

Who from Out of the Labor Force Is Most Likely to Find a Job?

2020 – 02

Marianna Kudlyak | January 13, 2020

The best predictor of someone from outside the labor force finding a job is how recently the person was employed, rather than their self-reported desire to work as is conventionally thought. Between 1999 and 2019, the composition of the out of the labor force group shifted towards people out of work for longer. Consequently, the pool has become less employable. This indicates that, even though the out of the labor force pool is larger, it does not signify additional labor market slack beyond that accounted for by the standard unemployment rate.

Long-Run Effects of the Earned Income Tax Credit

2020 – 01

David Neumark and Peter Shirley | January 6, 2020

The Earned Income Tax Credit (EITC) substantially subsidizes earnings for low- to moderate-income families with children in the United States. Research has established that the EITC has positive short-term effects on the employment of less-educated single mothers and reduces overall poverty. The EITC may also generate higher earnings in the long run, as the short-run positive employment effects for low-skilled women accumulate into greater labor market experience that makes them more productive.

The Economics of Climate Change: A First Fed Conference

2019 – 31

Galina B. Hale, Òscar Jordà, and Glenn D. Rudebusch | December 16, 2019

To better understand the implications of climate change for the financial sector and the broader economy, the Federal Reserve Bank of San Francisco recently hosted a conference on the economics of climate change to gather and debate the latest analyses from universities and policy institutions, nationally and abroad. It was the first Fed-sponsored conference devoted to investigating the economic and financial consequences and risks arising from climate change and potential policy responses.

Involuntary Part-Time Work a Decade after the Recession

2019 – 30

Marianna Kudlyak | November 25, 2019

Involuntary part-time employment reached unusually high levels during the last recession and declined only slowly afterward. The speed of the decline was limited because of a combination of two factors: the number of people working part-time due to slack business conditions was declining, and the number of those who could find only part-time work continued to increase until 2013. Involuntary part-time employment recently returned to its pre-recession level but remains slightly elevated relative to historically low unemployment, likely due to structural factors.

Riders on the Storm

2019 – 29

Òscar Jordà and Alan M. Taylor | November 18, 2019

A country’s interest rate often reflects more than just the policy stance of its central bank. Movements in the global neutral rate of interest and the domestic neutral rate also play a significant role. Estimates from international models for Japan, Germany, the United Kingdom, and the United States show that central bank policy explains less than half of the variation in interest rates. The rest of the time, the central bank is catching up to trends dictated by productivity growth, demographics, and other factors outside of its control.

Is Rising Concentration Hampering Productivity Growth?

2019 – 28

Peter J. Klenow, Huiyu Li, and Theodore Naff | November 4, 2019

U.S. productivity is growing slower than in the past. Meanwhile, sales have become increasingly concentrated in the largest businesses. Analysis suggests that IT innovation may have facilitated the rise in concentration by reducing the cost for large firms to enter new markets. This contributed to booming productivity growth from 1995 to 2005. Though large firms are more profitable, their expansion may have increased competition and reduced profit margins within markets. Lower profit margins in a given market could have deterred innovation, eventually lowering growth.

Yield Curve Responses to Introducing Negative Policy Rates

2019 – 27

Jens H.E. Christensen | October 15, 2019

Given the low level of interest rates in many developed economies, negative interest rates could become an important policy tool for fighting future economic downturns. Because of this, it’s important to carefully examine evidence from economies whose central banks have already deployed such policies. Analyzing financial market reactions to the introduction of negative interest rates shows that the entire yield curve for government bonds in those economies tends to shift lower. This suggests that negative rates may be an effective monetary policy tool to help ease financial conditions.

How Severe Is China’s Slowdown? Evidence from China CAT

2019 – 26

John Fernald, Neil Gerstein, and Mark Spiegel | October 7, 2019

China’s official GDP shows that its pace of economic growth has slowed gradually since 2010 but remains remarkably high, around 6%. A new index, the China Cyclical Activity Tracker, or China CAT, provides an alternative way to measure fluctuations in Chinese economic activity using a weighted average of several non-GDP indicators. The index suggests that economic activity has slowed noticeably since 2017 to a pace slightly below trend. GDP growth statistics appear excessively smooth over recent years, but, as of mid-2019, are in line with the China CAT.

Are Workers Losing to Robots?

2019 – 25

Sylvain Leduc and Zheng Liu | September 30, 2019

The portion of national income that goes to workers, known as the labor share, has fallen substantially over the past 20 years. Even with strong employment growth in recent years, the labor share has remained at historically low levels. Automation has been an important driving factor. While it has increased labor productivity, the threat of automation has also weakened workers’ bargaining power in wage negotiations and led to stagnant wage growth. Analysis suggests that automation contributed substantially to the decline in the labor share.

Zero Lower Bound Risk according to Option Prices

2019 – 24

Michael D. Bauer and Thomas M. Mertens | September 23, 2019

Interest rate derivatives—financial investments whose value depends on interest rates—provide useful information about the risk of short-term rates falling again to the zero lower bound. According to new market-based estimates, the probability of a return to the lower bound by the end of 2021 is about 24%. This is roughly in line with other survey-based and model-based estimates of zero lower bound risk. In recent months, the market-based measure of lower bound risk has increased markedly.

A New Balancing Act: Monetary Policy Tradeoffs in a Changing World

2019 – 23

Mary C. Daly | September 3, 2019

A new and less familiar economic environment has emerged in the United States and other countries. Our collective futures now include slower potential growth, lower long-term interest rates, and persistently weak inflation. This new landscape demands we think differently about how to balance and achieve price stability and full employment objectives. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the conference “Inflation Targeting—Prospects and Challenges” in Wellington, New Zealand, on August 29.

Negative Interest Rates and Inflation Expectations in Japan

2019 – 22

Jens H.E. Christensen and Mark M. Spiegel | August 26, 2019

After Japan introduced a negative policy interest rate in 2016, market expectations for inflation over the medium term fell immediately. This can be seen by assessing how prices for Japanese bonds with embedded deflation protection responded to the policy announcement. The reaction stresses the uncertainty surrounding the effectiveness of negative policy rates as expansionary tools when inflation expectations are anchored at low levels. Japan’s experience also illustrates the desirability of taking preemptive steps to avoid the zero interest rate bound.

Unemployment: Lower for Longer?

2019 – 21

Nicolas Petrosky-Nadeau and Robert G. Valletta | August 19, 2019

Unemployment is running near its 50-year low, but inflation has not picked up as expected. This suggests that the unemployment rate consistent with stable inflation has fallen. Combining a conventional Phillips curve tradeoff between unemployment and inflation with a noninflationary unemployment rate that can change over time shows that estimates of this unemployment threshold have declined toward 4% in recent years. One possible reason for this decline is improvements in how job matches are made, reflected in unusually favorable job-finding rates for disadvantaged groups.

The Brexit Price Spike

2019 – 20

Neil Gerstein, Bart Hobijn, Fernanda Nechio, and Adam Shapiro | August 5, 2019

In June 2016, citizens of the United Kingdom voted to leave the European Union by a small majority. This looming departure became known as “Brexit.” As a consequence of the Brexit referendum, the British pound depreciated sharply, and overall inflation ramped up in the following months. Comparing price movements between tradable and nontradable goods shows that close to two-thirds of the inflation spike in the United Kingdom since the Brexit vote can be attributed to the sharp movement in the exchange rate.

Why Is Inflation Low Globally?

2019 – 19

Òscar Jordà, Chitra Marti, Fernanda Nechio, and Eric Tallman | July 15, 2019

A hot economy eventually boosts inflation. Such is the simple wisdom of the Phillips curve. Yet inflation across developed countries has been remarkably weak since the 2008 global financial crisis, even though unemployment rates are near historical lows. What is behind this recent disconnect between inflation and unemployment? Contrasting the experiences of developed and developing economies before and after the financial crisis shows that broader factors than monetary policy are at play. Inflation has declined globally, and this trend preceded the financial crisis.

How Have Changing Sectoral Trends Affected GDP Growth?

2019 – 18

Andrew Foerster, Andreas Hornstein, Pierre-Daniel Sarte, and Mark Watson | July 8, 2019

Trend GDP growth has slowed about 2.3 percentage points to 1.7% since 1950. Different economic sectors have contributed to this slowing to varying degrees depending on the distinct trends of technology and labor growth in each sector. The extent to which sectors influence overall growth depends on the degree of spillovers to other sectors, which amplifies the effect of sectoral changes. Three sectors with slowing growth and linkages to other sectors—construction, nondurable goods, and professional and business services—account for 60% of the decline in trend GDP growth.

Is Slow Still the New Normal for GDP Growth?

2019 – 17

John Fernald and Huiyu Li | June 24, 2019

Estimates suggest the new normal pace for U.S. GDP growth remains between 1½% and 1¾%, noticeably slower than the typical pace since World War II. The slowdown stems mainly from demographic trends that have slowed labor force growth, about which there is relatively little uncertainty. A larger challenge is productivity. Achieving GDP growth consistently above 1¾% will require much faster productivity growth than the United States has typically experienced since the 1970s.

Why Is the Fed’s Balance Sheet Still So Big?

2019 – 16

Andrew Foerster and Sylvain Leduc | June 3, 2019

The Federal Reserve’s balance sheet is significantly larger today than it was before the financial crisis of 2008–2009. Rising demand for currency due to greater economic activity is partly responsible for this increase. The balance sheet will also need to remain large because the Federal Reserve now implements monetary policy in a regime of ample reserves, using a different set of tools than in the past to achieve its interest rate target.

Is the Hot Economy Pulling New Workers into the Labor Force?

2019 – 15

Regis Barnichon | May 20, 2019

Labor force participation among prime-age workers has climbed over the past few years, reversing from the substantial drop during and after the last recession. These gains might suggest that the strength of the job market is pulling people from the sidelines into the labor force. However, analysis that accounts for underlying flows between labor force states shows that, rather than drawing new people in, the hot labor market has instead reduced the number of individuals who are dropping out.

The Risk of Returning to the Zero Lower Bound

2019 – 14

Jens H.E. Christensen | May 13, 2019

Following the global financial crisis, U.S. monetary policy was constrained by the zero lower bound for short-term interest rates for many years. It has since lifted off and rates have gradually climbed. However, in light of the continuing economic expansion, it is relevant to ask how likely it is for the lower bound on interest rates to again become a constraint on monetary policy. Analysis using several different approaches suggests that there currently appears to be a low risk of the economy returning to the zero lower bound for at least the next several years.

Improving the Phillips Curve with an Interaction Variable

2019 – 13

Kevin J. Lansing | May 6, 2019

A key challenge for monetary policymakers is to predict where inflation is headed. One promising approach involves modifying a typical Phillips curve predictive regression to include an interaction variable, defined as the multiplicative combination of lagged inflation and the lagged output gap. This variable appears better able to capture the true underlying inflationary pressure associated with the output gap itself. Including the interaction variable helps improve the accuracy of Phillips curve inflation forecasts over various sample periods.

The Evolution of the FOMC’s Explicit Inflation Target

2019 – 12

Adam Shapiro and Daniel J. Wilson | April 15, 2019

Analyzing the narrative of historical Federal Open Market Committee meeting transcripts provides insights about how inflation target preferences of participants have evolved over time. From around 2000 until the Great Recession, there was general consensus among participants that their inflation target should be about 1½%, significantly below both average inflation over the period and survey measures of longer-run inflation expectations. By the end of the recession in 2009, however, the consensus had shifted up to 2%, which became the official target announced to the public in January 2012.

Does the Fed Know More about the Economy?

2019 – 11

Pascal Paul | April 8, 2019

In assessing the current or near-term state of the economy, forecasts from Federal Reserve staff seem to provide little additional information to improve commercial forecasts. However, Fed forecasts for economic growth a year or more in the future substantially enhance the accuracy of private-sector forecasts. The Fed’s policy announcements often reveal some of this forecast information. Accordingly, when the Fed surprises financial markets with indications of higher future interest rates, private forecasters tend to revise up their projections of future output growth.

Banks’ Real Estate Exposure and Resilience

2019 – 10

Simon Kwan | April 1, 2019

Real estate has hit record high prices and elevated valuations in some markets. Do bank lenders have sufficient capital to withstand a large price drop? While their portfolios have a similar concentration in real estate as they did before the global financial crisis, both underwriting standards and capitalization have improved significantly since then. Estimates using the Federal Reserve’s stress test scenarios suggest that, although a few small banks would be undercapitalized, the banking sector overall appears resilient enough to weather a steep decline in real estate prices.

Climate Change and the Federal Reserve

2019 – 09

Glenn D. Rudebusch | March 25, 2019

Climate change describes the current trend toward higher average global temperatures and accompanying environmental shifts such as rising sea levels and more severe storms, floods, droughts, and heat waves. In coming decades, climate change—and efforts to limit that change and adapt to it—will have increasingly important effects on the U.S. economy. These effects and their associated risks are relevant considerations for the Federal Reserve in fulfilling its mandate for macroeconomic and financial stability.

Modeling Financial Crises

2019 – 08

Pascal Paul | March 4, 2019

Research has revealed several facts about financial crises based on historical data. Crises are rare events that are associated with severe recessions that are typically deeper than normal recessions. They are usually preceded by a buildup of system imbalances, particularly a rapid increase of credit. Financial crises tend to occur after prolonged booms but do not necessarily result from large shocks. Recent work shows a novel way to replicate these facts in a standard macroeconomic model, which policymakers could use to gain insights to prevent future crises.

Inflationary Effects of Trade Disputes with China

2019 – 07

Galina Hale, Bart Hobijn, Fernanda Nechio, and Doris Wilson | February 25, 2019

Imports from China are an important part of overall U.S. imports of consumer and investment goods. Thus, tariffs on these imports are likely to have sizable effects on consumer, producer, and investment prices in this country. Tariffs implemented thus far may have contributed an estimated 0.1 percentage point to consumer price inflation and 0.4 percentage point to price inflation for business investment goods. If implemented, an across-the-board 25% tariff on all Chinese imports would raise consumer prices an additional 0.3 percentage point and investment prices an additional 1.0 percentage point.

Measuring Connectedness between the Largest Banks

2019 – 06

Galina Hale, Jose A. Lopez, and Shannon Sledz | February 19, 2019

The financial crisis provided a stark example of how interconnected the financial system is. Since then, researchers have developed several ways to monitor patterns of connectedness within the banking system. A key challenge is removing the impact of conditions that affect all banks in order to highlight evidence of direct connectedness. A new measure filters these common factors from bank stock market data. Estimates using this method show how different assumptions can affect conclusions about the connections among banks.

Inflation: Stress-Testing the Phillips Curve

2019 – 05

Òscar Jordà, Chitra Marti, Fernanda Nechio, and Eric Tallman | February 11, 2019

The well-known Phillips curve describes inflation as a persistent process that depends on public expectations of future inflation and economic slack, a measure of how stretched the economy’s resources are. The role of each component has changed over time. In particular, maintaining the public’s expectations that the Federal Reserve is committed to an inflation target of 2% has grown in importance over the slack component, in part because realigning expectations is costly to undo. Such considerations are important as the Federal Reserve evaluates its future policy options.

How Much Could Negative Rates Have Helped the Recovery?

2019 – 04

Vasco Cúrdia | February 4, 2019

The Federal Reserve dropped the federal funds rate to near zero during the Great Recession to bolster the U.S. economy. Allowing the federal funds rate to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential. It also may have allowed inflation to rise faster toward the Fed’s 2% target. In other words, negative interest rates may be a useful tool to promote the Fed’s dual mandate.

Nonmanufacturing as an Engine of Growth

2019 – 03

Huiyu Li | January 22, 2019

In official statistics, manufacturing is the top contributor to U.S. productivity growth despite its shrinking share of employment. However, official numbers tend to understate growth among new producers that improve on existing producers, which is more prevalent outside of manufacturing. Accounting for such missing productivity growth shows that it plays a larger role in sectors such as retail trade and services. Also, the relative contribution of manufacturing to productivity growth has dropped significantly. These findings suggest that nonmanufacturing may be an increasingly important engine of U.S. growth.

Does Ultra-Low Unemployment Spur Rapid Wage Growth?

2019 – 02

Sylvain Leduc, Chitra Marti, and Daniel J. Wilson | January 14, 2019

The unemployment rate ended 2018 at just under 4%, substantially lower than most estimates of the natural rate. Could such an ostensibly tight labor market lead to a sharp pickup in wage growth from its recent moderate pace, such that the relationship between wage growth and unemployment is not always linear? Investigations using state-level data show no economically significant nonlinearity between wage growth and unemployment that would predict an abrupt jump in wage growth.

How Much Do We Spend on Imports?

2019 – 01

Galina Hale, Bart Hobijn, Fernanda Nechio, and Doris Wilson | January 7, 2019

When U.S. shoppers buy something imported, are they also paying for local inputs? How much of what is “Made in the U.S.A.” actually is? These questions require accounting for both the U.S. components in the price of imported goods and the use of imported inputs in U.S. production. Estimates show that nearly half of spending on imports stays in the United States, paying for the local components of these goods. Over 10 cents of every dollar U.S. consumers spend reflects the cost of imports at various stages of production.

Using Sentiment and Momentum to Predict Stock Returns

2018 – 29

Kevin J. Lansing and Michael Tubbs | December 24, 2018

Studies that seek to forecast stock price movements often consider measures of market sentiment or stock return momentum as predictors. Recent research shows that a multiplicative combination of sentiment and momentum can help predict the return on the Standard & Poor’s 500 stock index over the next month. This predictive power derives mainly from periods when sentiment has been declining over the past year and recent return momentum is negative—periods that coincide with an increase in investor attention to the stock market as measured by a Google search volume index.

Do Opioids Slow Return to Work after Injuries?

2018 – 28

David Neumark and Bogdan Savych | December 10, 2018

Some reports blame opioid use for part of the decline in labor force participation among adult men. Estimates based on workers’ compensation data shed light on the relationship between opioid prescriptions and the return to work among people who suffer work-related low-back injuries, for which opioid use is common. Differences in opioid prescribing patterns across locations demonstrate how various use of these medications can impact how quickly workers return to work. When opioids are prescribed for longer-term treatment, workers have considerably longer durations of temporary disability following an injury.

A Review of the Fed’s Unconventional Monetary Policy

2018 – 27

Glenn D. Rudebusch | December 3, 2018

The Federal Reserve has typically used a short-term interest rate as the policy tool for achieving its macroeconomic goals. However, with short-term rates constrained near zero for much of the past decade, the Fed was impelled to use two unconventional monetary policy tools: forward guidance and quantitative easing. These tools likely strengthened the economic recovery and helped return inflation to the Fed’s target—although their full impact remains uncertain.

Has Inflation Sustainably Reached Target?

2018 – 26

Adam Shapiro | November 26, 2018

A key measure of inflation finally reached the Fed’s 2% target in July after remaining persistently below that for years after the end of the last recession. Analysis shows that most of the increase in personal consumption expenditures price inflation towards the Fed’s target can be attributed to acyclical factors and are not due to a strengthening economy. While risks to the outlook for inflation appear broadly balanced, they include the considerable possibility that inflation has not yet sustainably reached target.

The Labor Force Participation Rate Trend and Its Projections

2018 – 25

Andreas Hornstein, Marianna Kudlyak, and Annemarie Schweinert | November 19, 2018

A labor force participation rate that is at or above its long-run trend is consistent with a labor market at or above full employment. In 2018, the estimated rate is at its trend of 62.8%, suggesting that the labor market is at full employment. Studying the population’s demographic makeup and labor trends for different groups sheds some light on what is driving the aggregate participation trend and implications for the future. Projections based on these trends estimate that labor participation will decline about 2.5 percentage points over the next decade.

Why Aren’t U.S. Workers Working?

2018 – 24

Mary C. Daly, Joseph H. Pedtke, Nicolas Petrosky-Nadeau, and Annemarie Schweinert | November 13, 2018

Labor force participation among U.S. men and women ages 25 to 54 has been declining for nearly 20 years, a stark contrast with rising participation in Canada over this period. Three-fourths of the difference between the two countries can be explained by the growing gap in labor force attachment of women. A key factor is the extensive parental leave policies in Canada. If the United States could reverse the trend in participation of prime-age women to match Canada, it would see 5 million additional prime-age workers join the labor force.

The Slope of the Yield Curve and the Near-Term Outlook

2018 – 23

Jens H.E. Christensen | October 15, 2018

The yield spread between long-term and short-term Treasury securities is known to be a good predictor of economic activity, particularly of looming recessions. One way to learn more is through a careful scrutiny of the historical variation of such yield spreads and how they relate to the current slope of the Treasury yield curve. The results suggest that the recent flattening of the yield curve implies only a slightly elevated risk of a recession in the near term relative to any other month.

How Persistent Are the Effects of Sentiment Shocks?

2018 – 22

Jess Benhabib, Ben Shapiro, and Mark M. Spiegel | October 1, 2018

People’s feelings about the economy have been shown to be strongly connected to a state’s current economic health over short horizons. So, how well do such consumer sentiment measures coincide with economic growth over a longer period? Sentiment shocks are associated with large and statistically significant changes in state economic output over as long as a three-year horizon. While the sentiment shocks initially affect state consumption expenditures to a smaller degree, the impact tends to be more persistent, continuing as long as five years after the initial shock.

The Prime-Age Workforce and Labor Market Polarization

2018 – 21

Rob Valletta and Nathaniel Barlow | September 10, 2018

U.S. labor force participation by people in their prime working years fell substantially during the Great Recession, and it remains depressed despite some recovery since 2015. This appears to reflect longer-term developments, rather than lingering effects from the recession. One key factor is labor market polarization—manifested in the gradual disappearance of manual jobs—which helps predict declining worker attachment across states. This has been reinforced by other long-term economic and social trends, such as health considerations, that also have eroded prime-age labor force attachment.

Information in the Yield Curve about Future Recessions

2018 – 20

Michael D. Bauer and Thomas M. Mertens | August 27, 2018

The ability of the Treasury yield curve to predict future recessions has recently received a great deal of public attention. An inversion of the yield curve—when short-term interest rates are higher than long-term rates—has been a reliable predictor of recessions. The difference between ten-year and three-month Treasury rates is the most useful term spread for forecasting recessions—without any adjustment for an estimate of the underlying term premium. However, such correlations in the data do not identify cause and effect, which complicates their interpretation.

The Financial Crisis at 10: Will We Ever Recover?

2018 – 19

Regis Barnichon, Christian Matthes, and Alexander Ziegenbein | August 13, 2018

A decade after the last financial crisis and recession, the U.S. economy remains significantly smaller than it should be based on its pre-crisis growth trend. One possible reason lies in the large losses in the economy’s productive capacity following the financial crisis. The size of those losses suggests that the level of output is unlikely to revert to its pre-crisis trend level. This represents a lifetime present-value income loss of about $70,000 for every American.

Fiscal Policy in Good Times and Bad

2018 – 18

Tim Mahedy and Daniel J. Wilson | July 9, 2018

Thanks in large part to recently enacted tax cuts, U.S. fiscal policy has taken a decidedly procyclical turn—providing stimulus when the economy is growing. In fact, the projected increase in the federal deficit over the next few years would represent the most procyclical fiscal policy stance since the Vietnam War. This matters because many recent studies have found that fiscal stimulus has a smaller impact when the economy is strong, implying that the near-term boost to GDP growth could be two-thirds or less of that from previous tax cuts.

Can the Income-Expenditure Discrepancy Improve Forecasts?

2018 – 17

James Aylward, Kevin J. Lansing, and Tim Mahedy | June 25, 2018

Gross domestic income and gross domestic product—GDI and GDP—measure aggregate economic activity using income and expenditure data, respectively. Discrepancies between the initial estimates of quarterly growth rates for these two measures appear to have some predictive power for subsequent GDP revisions. However, this power has weakened considerably since 2011. Similarly, the first revision to GDP growth has less predictive power in forecasting subsequent revisions since 2011. One possible explanation is that evolving data collection and estimation methods have helped improve initial GDP and GDI estimates.

Do Foreign Funds Matter for Emerging Market Bond Liquidity?

2018 – 16

Jens H.E. Christensen, Eric Fischer, and Patrick Shultz | June 18, 2018

Many investors have turned to emerging market bonds seeking higher returns in the current low interest rate environment. This raises a natural question about the potential for financial instability if investors choose to sell off those bonds quickly. Studying how changes in foreign holdings of Mexican government bonds known as bonos affected their liquidity premiums provides an assessment of the risks and benefits from foreign investment in an emerging economy. Results show that the larger foreign market share of Mexican sovereign bonds tends to increase their liquidity risk premium.

Getting from Diversity to Inclusion in Economics

2018 – 15

Mary C. Daly | June 4, 2018

For the economics profession to become more diverse, leaders must focus on building an inclusive culture that welcomes new voices and listens to new ideas. This means putting out the welcome mat, asking newcomers what they think, and letting their answers influence our future. That will be key to changing the statistics. The following is adapted from a speech by the director of research of the Federal Reserve Bank of San Francisco to the Gender and Career Progression Conference at the Bank of England in London on May 14.

Is GDP Overstating Economic Activity?

2018 – 14

Zheng Liu, Mark M. Spiegel, and Eric B. Tallman | May 29, 2018

Since late 2015, growth in real GDP has consistently exceeded that in real GDI, a prominent alternative measure of aggregate output, with an average difference of about 0.65 percentage point. Is real GDP overstating the expansion? One way to address this question is by comparing the accuracy of these measures in forecasting a benchmark measure of economic activity, the Chicago Fed National Activity Index. The comparison suggests that GDP consistently outperforms GDI in predicting recent real economic activity. Therefore, the weaker GDI growth does not necessarily indicate slower economic growth.

The Future Fortunes of R-star: Are They Really Rising?

2018 – 13

John C. Williams | May 21, 2018

In the current economic environment, it’s important to distinguish between the strong economic conditions and the key longer-run drivers underpinning interest rates. Three factors—demographics, productivity growth, and the demand for safe assets—all point to the natural rate of interest, known as r-star, remaining low for quite some time. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the Economic Club of Minnesota in Minneapolis on May 15.

How Futures Trading Changed Bitcoin Prices

2018 – 12

Galina Hale, Arvind Krishnamurthy, Marianna Kudlyak, and Patrick Shultz | May 7, 2018

From Bitcoin’s inception in 2009 through mid-2017, its price remained under $4,000. In the second half of 2017, it climbed dramatically to nearly $20,000, but descended rapidly starting in mid-December. The peak price coincided with the introduction of bitcoin futures trading on the Chicago Mercantile Exchange. The rapid run-up and subsequent fall in the price after the introduction of futures does not appear to be a coincidence. Rather, it is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset.

How Much Consumption Responds to Government Stimulus

2018 – 11

Marios Karabarbounis, Marianna Kudlyak, and M. Saif Mehkari | April 16, 2018

What is the effect of government spending on private consumption? Estimates show that stimulus distributed through the American Recovery and Reinvestment Act had a large positive effect. Estimates from regional data suggest every $100 of stimulus generated an additional $18 within regions. Furthermore, by accounting for economic connections that spread the impact beyond regional borders, a new study finds that every $100 triggered an increase of $40 in overall private consumption in the economy.

Supporting Strong, Steady, and Sustainable Growth

2018 – 10

John C. Williams | April 9, 2018

The U.S. economy is on course to be as strong as in many decades, and inflation is moving closer to the Federal Reserve’s target. The challenge for monetary policy is to keep it that way. While this is never an easy task, the Fed is well positioned to achieve its goals and respond to unexpected developments. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the World Affairs Council of Sonoma in Santa Rosa, CA, on April 6.

Raising the Speed Limit on Future Growth

2018 – 09

Mary C. Daly | April 2, 2018

The U.S. economy is facing a future of slow growth, mainly because the labor force is expanding less rapidly. However, there are ways to improve. Given the important role education plays in labor force participation, employment, and wages, investing in education across diverse groups offers an important opportunity to raise the speed limit for economic growth. The following is adapted from a speech by the executive vice president and director of research of the Federal Reserve Bank of San Francisco to Lambda Alpha International Land Economics Society in Phoenix, AZ, on March 29.

Do Adjustment Lags Matter for Inflation-Indexed Bonds?

2018 – 08

Jens H.E. Christensen | March 26, 2018

Some governments sell bonds that protect against variation in inflation. Payments of these bonds are adjusted in response to official inflation measurements with a lag. Considering the effects of such lags could matter both for understanding market-based measures of inflation compensation and for governments deciding what type of inflation-indexed securities to issue. Analyzing pairs of U.K. bonds with almost identical maturities but different lags in inflation adjustment suggests that the lag length matters mainly close to maturity, when seasonality in the underlying price index plays a role.

Economic Forecasts with the Yield Curve

2018 – 07

Michael D. Bauer and Thomas M. Mertens | March 5, 2018

The term spread—the difference between long-term and short-term interest rates—is a strikingly accurate predictor of future economic activity. Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve. Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession. While the current environment is somewhat special—with low interest rates and risk premiums—the power of the term spread to predict economic slowdowns appears intact.

Monetary Policy Cycles and Financial Stability

2018 – 06

Pascal Paul | February 26, 2018

Recent research suggests that sustained accommodative monetary policy has the potential to increase financial instability. However, under some circumstances tighter monetary policy may increase financial fragility through two channels. First, a surprise tightening tends to reduce the market value of banks’ equity and raise their market leverage, exacerbating balance sheet fragility in the short run. Second, increases in the federal funds rate have historically been followed by an expansion of assets held by money market funds, which proved to be a source of instability in the 2007-09 financial crisis.

Do Job Market Networks Help Recovery from Mass Layoffs?

2018 – 05

David Neumark, Judith K. Hellerstein, and Mark J. Kutzbach | February 20, 2018

Labor market networks are informal connections among neighbors, coworkers, family, and friends that help people find jobs through sharing information about job openings or applicants. These networks appear to play a valuable role in helping workers recover after mass layoffs. Among relatively low-skilled workers who lost their jobs in mass layoffs, those living in neighborhoods with stronger labor market connections among neighbors found new jobs more quickly. Moreover, workers who found jobs through network connections also found better positions that paid more and lasted longer.

The Disappointing Recovery in U.S. Output after 2009

2018 – 04

John Fernald, Robert E. Hall, James H. Stock, and Mark W. Watson | February 12, 2018

U.S. output has expanded only slowly since the recession trough in 2009, counter to normal expectations of a rapid cyclical recovery. Removing cyclical effects reveals that the deep recession was superimposed on a sharply slowing trend in underlying growth. The slowing trend reflects two factors: slow growth of innovation and declining labor force participation. Both of these powerful adverse forces were in place before the recession and, thus, were not the result of the financial crisis or policy changes since 2009.

Expecting the Expected: Staying Calm When the Data Meet the Forecasts

2018 – 03

John C. Williams | February 5, 2018

The expansion is proceeding at a good pace, unemployment is low, and inflation is finally headed in the right direction. The data show no signs of an economy going into overdrive. This suggests that further gradual increases in interest rates are likely in 2018, assuming the data continue to come in largely as expected. The following is adapted from remarks by the president and CEO of the Federal Reserve Bank of San Francisco to the Financial Women of San Francisco on February 2.

How Do Banks Cope with Loss?

2018 – 02

Rhys Bidder, John Krainer, and Adam Shapiro | January 22, 2018

When lenders experience unexpected losses, the supply of credit to borrowers can be disrupted. Researchers and policymakers have long sought estimates of how the availability of loans changes following a shock. The sudden oil price decline in 2014 offers an opportunity to observe precisely how affected lenders altered their portfolios. Banks that were involved with oil and gas producers cut back on some types of lending—consistent with traditional views of bank behavior. However, they expanded other types of lending and asset holdings with a bias towards less risky securities.

Valuation Ratios for Households and Businesses

2018 – 01

Thomas Mertens, Patrick Shultz, and Michael Tubbs | January 8, 2018

Current valuation ratios for U.S. equities and household net worth are high relative to historical benchmarks. The cyclically adjusted price-to-earnings ratio reached its third highest level on record recently, and the ratio of household net worth to disposable income, which includes a broad set of household assets, stands at a record high. Such extreme values of these ratios have historically been followed by reversions toward their long-run averages. However, other current factors, such as low interest rates, caution against bearish forecasts.

Monetary Policy and the Economic Outlook: A Fine Balancing Act

2017 – 36

John C. Williams | December 18, 2017

The economy is in a good place. Unemployment is low and confidence is high. The challenges to address are good ones: keeping the expansion going, bringing inflation up to its 2% target, and using this period to normalize monetary policy in general and interest rates in particular. The years ahead will require a balanced approach, guided by the data. The following is adapted from remarks by the president and CEO of the Federal Reserve Bank of San Francisco at the 54th Annual Economic Forecast, Phoenix, AZ, on November 29.

What’s Down with Inflation?

2017 – 35

Tim Mahedy and Adam Shapiro | November 27, 2017

After eight years of economic recovery, inflation remains below the FOMC’s target. Dissecting the underlying price data by spending category reveals that low inflation largely reflects prices that are relatively insensitive to overall economic conditions. Notably, modest increases in health-care prices, which have been held down by mandated cuts to the growth of Medicare payments, have helped moderate overall inflation. Further slow growth in health-care prices is likely to remain a drag on inflation.

A New Conundrum in the Bond Market?

2017 – 34

Michael D. Bauer | November 20, 2017

When the Federal Reserve raises short-term interest rates, the rates on longer-term Treasuries are generally expected to rise. However, even though the Fed has raised short-term interest rates three times since December 2016 and started reducing its asset holdings, Treasury yields have dropped instead. This decoupling of short-term and long-term rates is reminiscent of the “Greenspan conundrum” of 2004–05. This time, however, evidence suggests compelling explanations—a lower “normal” interest rate, the risk of persistently low inflation, and fiscal and geopolitical uncertainty—may account for the yield curve flattening.

Stock Market Valuation and the Macroeconomy

2017 – 33

Kevin J. Lansing | November 13, 2017

History suggests that extreme run-ups in the cyclically adjusted price-earnings ratio are a signal that the stock market may be overvalued. A simple regression model using a small set of macroeconomic explanatory variables can account for most of the run-up in the CAPE ratio since 2009, offering some justification for its current elevated level. The model predicts a modest decline in the ratio over the next decade. All else being equal, such a decline would imply lower stock returns relative to those in recent years when the ratio was rising.

The Perennial Problem of Predicting Potential

2017 – 32

John C. Williams | November 6, 2017

Potential output—the maximum amount an economy can produce over the long run—is an important indicator policymakers use to gauge a country’s current economic health and expectations for future growth. However, potential output can’t be observed directly, and estimating it is difficult, even with modern, sophisticated methods. Monetary policymakers are well advised to account for the perennial problem of uncertainty surrounding these estimates in devising and carrying out policy strategies.

Missing Growth from Creative Destruction

2017 – 31

Pete Klenow and Huiyu Li | October 23, 2017

When products disappear from the market with no substitutes from the same manufacturer, they may have been replaced by cheaper or better products from a different manufacturer. Official measurements typically approximate price changes from such creative destruction using price changes for products that were not replaced. This can lead to overstating inflation and, in turn, understating economic growth. A recent estimate suggests that around 0.6 percentage point of growth is missed per year. The bias has not increased over time, however, so it does not explain the slowdown in productivity growth.

Has the Wage Phillips Curve Gone Dormant?

2017 – 30

Sylvain Leduc and Daniel J. Wilson | October 16, 2017

Although the labor market has steadily strengthened, wage growth has remained slow in recent years. This raises the question of whether the wage Phillips curve—the traditional relationship between labor market slack and wage growth—has weakened. Estimating a causal link from slack to wage growth using national data is difficult. However, using city-level data over the past 25 years shows that the cross-city relationship has weakened since the Great Recession. Explanations consistent with this timing suggest that the Phillips curve may return to a steeper curve in the future.

Interest Rates and the “New Normal”

2017 – 29

John C. Williams | October 10, 2017

The Federal Reserve is moving towards more normal monetary policy, which means rising interest rates. But factors including the real natural rate of interest, a slower sustainable pace of growth, and inflation all point to a new normal where interest rates are lower than in the 1990s and early 2000s. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the Community Banking in the 21st Century Research and Policy Conference in St. Louis on October 5.

China’s Exchange Rate Policies and U.S. Financial Markets

2017 – 28

Thomas M. Mertens and Patrick Shultz | October 2, 2017

Exchange rate stabilization or currency “pegs” are among the most prevalent interventions in international financial markets. Removing a peg to a safer currency can make the home currency more risky and less attractive to investors. When a country with market influence removes its peg from a safer country, the risk associated with holding either currency can be affected. Analyzing the effects of a scenario that changes a peg of the renminbi from the U.S. dollar to a basket of currencies suggests that China’s interest rates increase while U.S. interest rates decrease.

Demographic Transition and Low U.S. Interest Rates

2017 – 27

Carlos Carvalho, Andrea Ferrero, and Fernanda Nechio | September 25, 2017

Interest rates have been trending down for more than two decades. One possible explanation is the dramatic worldwide demographic transition, with people living longer and population growth rates declining. This demographic transition in the United States—particularly the steady increase in life expectancy—put significant downward pressure on interest rates between 1990 and 2016. Because demographic movements tend to be long-lasting, their ongoing effects could keep interest rates near the lower bound longer. This has the potential to limit the scope for central banks to respond to future recessionary shocks.

Disappointing Facts about the Black-White Wage Gap

2017 – 26

Mary C. Daly, Bart Hobijn, and Joseph H. Pedtke | September 5, 2017

More than half a century since the Civil Rights Act became law, U.S. workers continue to experience different levels of success depending on their race. Analysis using microdata on earnings shows that black men and women earn persistently lower wages compared with their white counterparts and that these gaps cannot be fully explained by differences in age, education, job type, or location. Especially troubling is the growing unexplained portion of the divergence in earnings for blacks relative to whites.

How Much Has Job Matching Efficiency Declined?

2017 – 25

Andreas Hornstein and Marianna Kudlyak | August 28, 2017

During the recession and recovery, hiring has been slower than might be expected considering the large numbers of vacant jobs and unemployed individuals. This raises some concern about structural changes in the process of matching job seekers with employers. However, the standard measures account for only the unemployed and not those who are out of the labor force. Including other non-employed groups in the measured pool of job seekers while adjusting for different job finding rates among these groups shows that the decline in matching efficiency is similar to earlier declines.

Forecasting China’s Role in World Oil Demand

2017 – 24

Deepa D. Datta and Robert J. Vigfusson | August 21, 2017

Although China’s growth has slowed recently, the country’s demand for oil could be entering a period of faster growth that could result in substantially higher oil prices. Because Americans buy and sell oil and petroleum products in the global market, global demand prospects influence the profitability of U.S. oil producers and the costs paid by U.S. consumers. Analysis based on the global relationship between economic development and oil demand illustrates the prospects for Chinese oil demand growth and the resulting opportunities and challenges for U.S. producers and consumers.

The Natural Rate of Unemployment over the Past 100 Years

2017 – 23

Regis Barnichon and Christian Matthes | August 14, 2017

The natural rate of unemployment, or u-star, is used by economists and policymakers to help assess the overall state of the labor market. However, the natural rate is not directly observable and must be estimated. A new statistical approach estimates the natural rate over the past 100 years. Results suggest the natural rate has been remarkably stable over history, hovering between 4.5 and 5.5% for long periods, even during the Great Depression. Recent readings on the unemployment rate have been running slightly below the natural rate estimate.

Monetary Policy’s Role in Fostering Sustainable Growth

2017 – 22

John C. Williams | August 7, 2017

As the economy has transitioned from recovery to expansion, the role of monetary policy has shifted to sustaining the expansion by gradually moving conventional and unconventional policy back to normal. But monetary policy is reaching its limit for stimulating growth, calling for private and public sector investments and policies to step up and take the lead. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Economic Club of Las Vegas in Las Vegas on August 2.

Bridging the Gap: Forecasting Interest Rates with Macro Trends

2017 – 21

Michael D. Bauer | July 31, 2017

Interest rates are inherently difficult to predict, and the simple random walk benchmark has proven hard to beat. But macroeconomics can help, because the long-run trend in interest rates is driven by the trend in inflation and the equilibrium real interest rate. When forecasting rates several years into the future, substantial gains are possible by predicting that the gap between current interest rates and this long-run trend will close with increasing forecast horizon. This evidence suggests that accounting for macroeconomic trends is important for understanding, modeling, and forecasting interest rates.

What’s Holding Back Business Formation?

2017 – 20

Patrick Kiernan and Huiyu Li | July 10, 2017

The pace of business start-ups in the United States has declined over the past few decades. Economic theory suggests that business creation depends on the available workforce, and data analysis supports this strong link. By contrast, the relationship between start-ups and labor productivity is less well-defined, in part because entrepreneurs face initial costs that rise with productivity, specifically their own lost income from alternative employment. Overall, policies that incorporate improving labor availability may help to boost new business growth.

The Global Growth Slump: Causes and Consequences

2017 – 19

John C. Williams | July 3, 2017

Demographic factors like slowing population and labor force growth, along with a global productivity slowdown, are fundamentally redefining achievable economic growth. These global shifts suggest the disappointing growth in recent years is a harbinger of the future. While the causes of the growth slump are well defined, the consequences will be shaped by choices that policymakers are grappling with around the globe. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at Macquarie University, Sydney, Australia, on June 27.

Has the Dollar Become More Sensitive to Interest Rates?

2017 – 18

John Fernald, Thomas M. Mertens, and Patrick Shultz | June 26, 2017

Interest rates in the United States have diverged from the rates of other countries over the past few years. Some commentators have voiced concerns that, as a result, exchange rates might be more sensitive to unanticipated changes in U.S. interest rates now than they were historically. However, an examination of market-based measures of policy expectations finds no convincing evidence that the U.S. dollar has become more sensitive since 2014.

New Evidence for a Lower New Normal in Interest Rates

2017 – 17

Jens H.E. Christensen and Glenn D. Rudebusch | June 19, 2017

Interest rates during the current economic recovery have been unusually low. Some have argued that yields have been pushed down by declines in longer-run expectations of the normal inflation-adjusted short-term interest rate—that is, by a drop in the so-called equilibrium or natural rate of interest. New evidence from financial markets shows that a decline in this rate has indeed contributed about 2 percentage points to the general downward trend in yields over the past two decades.

R-star, Uncertainty, and Monetary Policy

2017 – 16

Kevin J. Lansing | May 30, 2017

Investors’ demand for safe assets tends to increase when there’s more uncertainty, as in recessions. Consistent with this idea, short-term movements in the natural rate of interest, or r-star, are negatively correlated with an index of macroeconomic uncertainty. This relationship may be relevant for assessing monetary policy. An estimated policy rule that incorporates both r-star and the uncertainty index can largely reproduce the path of the federal funds rate since 1988, except during periods when policy was constrained by the zero lower bound.

Reserve Requirements as a Chinese Macro Policy Tool

2017 – 15

Zheng Liu and Mark M. Spiegel | May 22, 2017

China’s central bank frequently adjusts its reserve requirements for commercial banks as a way to stabilize economic fluctuations. These adjustments affect the overall credit supply but can also lead to the reallocation of credit and capital. Evidence shows that increases in reserve requirements raise off-balance-sheet lending, which typically benefits China’s more productive private sector, at the expense of on-balance-sheet loans to less productive state-owned enterprises. Under certain conditions, reserve requirements can be a useful additional policy instrument for improving resource allocations and also for macroeconomic stabilization in China.

Constructing the Home Purchase Sentiment Index

2017 – 14

James A. Wilcox | May 15, 2017

Consumer attitudes about buying and selling homes can inform us about future housing and mortgage markets. The Home Purchase Sentiment Index (HPSI) summarizes data from the National Housing Survey on consumers’ conditions, attitudes, and intentions about housing. The HPSI shows promise both as a stand-alone indicator and as a supplement for evaluating and forecasting housing and mortgage markets. Analysis reveals the index accurately projected strong home sales in 2014 and 2015 and a weaker outlook toward the end of 2016, following the sharp rise in mortgage interest rates.

Preparing for the Next Storm: Reassessing Frameworks and Strategies in a Low R-star World

2017 – 13

John C. Williams | May 8, 2017

Now is the right time to ask whether the monetary policy framework and strategy that worked well in the past are well suited to address the challenges ahead. A flexible price-level targeting framework has the important traits of adaptability, accessibility, and accountability. It also offers significant advantages over inflation targeting for meeting price stability and employment goals. The following is adapted from a presentation by the president and CEO of the San Francisco Fed to the Shadow Open Market Committee in New York on May 5.

Measuring Interest Rate Risk in the Very Long Term

2017 – 12

Jens H.E. Christensen, Jose A. Lopez, and Paul L. Mussche | April 24, 2017

Insurance companies write policies to cover potential risks far into the future. Because the life of these contracts can extend well beyond the 30-year maturities for the longest U.S. Treasuries, it’s difficult to measure the interest rate risk involved. A new study describes how the long-term interest rates required to evaluate such long-lived liabilities can be extrapolated from shorter-maturity bond yields using a standard yield curve model. These extrapolations are a useful tool since they have very small errors relative to the yield curve variation typically considered for risk management.

Brexit: Whither the Pound?

2017 – 11

Pierre-Olivier Gourinchas and Galina Hale | April 17, 2017

People of the United Kingdom voted to exit the European Union last June, a process dubbed “Brexit.” The persistent depreciation of the British pound since the vote suggests that U.K. economic conditions will be weakened over the long run following the separation from the EU. This projection of a persistent economic loss is based on the expected reversal of earlier gains from trade with other EU members and reduced cross-border labor flows.

What’s in the News? A New Economic Indicator

2017 – 10

Adam Hale Shapiro and Daniel J. Wilson | April 10, 2017

Newspaper articles and editorials about the economy do more than just report on official data releases. They also often convey how the journalist and those interviewed feel about the economy. Researchers have recently developed ways to extract data on sentiment from news articles using text analysis and machine learning techniques. These measures of news sentiment track current economic conditions quite well. In fact, they often do a better job than standard consumer sentiment surveys at forecasting future economic conditions.

Monetary Policy Medicine: Large Effects from Small Doses?

2017 – 09

Òscar Jordà, Moritz Schularick, and Alan M. Taylor | April 3, 2017

If inflation increases rapidly, how do we know that higher interest rates will bring prices under control? And how do we know how much of the monetary “medicine” to administer? Economics relies primarily on observational data to answer such questions, while medical research uses randomized controlled trials to evaluate treatments. Applying that method to economics, the long history of international finance turns out to be an excellent laboratory to conduct monetary experiments. These experiments suggest that interest rates have sizable effects on the economy.

Measuring Labor Utilization: The Non-Employment Index

2017 – 08

Marianna Kudlyak | March 27, 2017

The elevated number of non-employed people who are out of the labor force has raised some concerns about how well the headline unemployment rate measures available labor. An alternative measure of labor utilization, the Non-Employment Index, accounts for all non-employed individuals, distinguishing between groups like short-term versus long-term unemployed, discouraged workers, retirees, and disabled individuals, and adjusting for how likely each is to transition to employment. Current data show the index is very close to its value in 2005–06, the period near the peak of the previous economic expansion.

How Tight Is the U.S. Labor Market?

2017 – 07

Regis Barnichon and Geert Mesters | March 20, 2017

The U.S. unemployment rate fell to a very low level at the end of 2016, raising the question of whether the labor market has become too tight. After applying a new method to adjust for demographic changes in the labor force, the current unemployment rate is still 0.3 to 0.4 percentage point higher than at past labor market peaks. This indicates that the labor market may not be quite as tight as the headline unemployment rate suggests.

Age Discrimination and Hiring of Older Workers

2017 – 06

David Neumark, Ian Burn, and Patrick Button | February 27, 2017

Population aging and the consequent increased financial burden on the U.S. Social Security system is driving new proposals for program reform. One major reform goal is to create stronger incentives for older individuals to stay in the workforce longer. However, hiring discrimination against older workers creates demand-side barriers that limit the effectiveness of these supply-side reforms. Evidence from a field experiment designed to test for hiring discrimination indicates that age discrimination makes it harder for older individuals, especially women, to get hired into new jobs.

Three Questions on R-star

2017 – 05

John C. Williams | February 21, 2017

The decline in the natural rate of interest, or r-star, over the past decade raises three important questions. First, is this low level for the real short-term interest rate unique to the U.S. economy? Second, is the natural rate likely to remain low in the future? And third, is this low level confined to “safe” assets? In answer to these questions, evidence suggests that low r-star is a global phenomenon, is likely to be very persistent, and is not confined only to safe assets.

Does Growing Mismeasurement Explain Disappointing Growth?

2017 – 04

David Byrne, John G. Fernald, and Marshall Reinsdorf | February 13, 2017

Slowing growth in U.S. productivity after 2004 is sometimes blamed on measurement problems, particularly in assessing the gains from innovation in IT-related goods and services. However, mismeasurement also occurred before the slowdown and, on balance, there is no evidence that it has worsened. Some innovations—such as free Internet services—have grown increasingly important, but they mainly affect leisure time. Moreover, the non-market benefits do not appear large enough to offset the effects of the business-sector slowdown.

Do All New Treasuries Trade at a Premium?

2017 – 03

Jens H.E. Christensen, Jose A. Lopez, and Patrick Shultz | February 6, 2017

In the Treasury market, the most recently issued security typically trades at a higher price than more seasoned but otherwise comparable securities. The difference is known as the “on-the-run” premium. This phenomenon opens the question of whether a similar premium exists for all Treasury bonds. Examining yield spreads between pairs of inflation-protected securities, known as TIPS, that have identical maturities but different issue dates suggests that this is not the case: There is no on-the-run premium in the TIPS market at this time.

Looking Back, Looking Ahead

2017 – 02

John C. Williams | January 23, 2017

The U.S. economy is in good shape, with the labor market at maximum employment and inflation nearing the Fed’s goal. Given the progress made on these goals and signs of continued solid momentum, it makes sense to gradually move interest rates toward more normal levels. The actual pace of increases will be driven by the evolution of economic conditions and its implications for achieving the Fed’s dual mandate objectives. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the 2017 Economic Forecast in Sacramento on January 17.

How Does Business Dynamism Link to Productivity Growth?

2017 – 01

Huiyu Li | January 9, 2017

The rate of business turnover has declined since the late 1970s, which some argue has hampered growth in innovation and productivity. This sounds like a plausible contributor to lackluster economic growth, but the connection between business turnover and productivity is more subtle. First, while business turnover has steadily declined over the past 35 years, aggregate productivity growth has not. Second, even when business starts were at historical highs, existing firms lost very little market share to new firms. This suggests that older firms are just as innovative as newcomers.

How Important Is Information from FOMC Minutes?

2016 – 37

Fernanda Nechio and Daniel J. Wilson | December 19, 2016

To foster transparency and accountability in monetary policy, the Federal Open Market Committee publishes a statement immediately following every FOMC meeting, followed by the full minutes of the meeting three weeks later. Evidence suggests the release of the minutes can have a sizable impact on Treasury bond yields. The impacts are largest when the tone of the minutes differs from the tone of the statement. This presumably leads markets to change their expectations of future monetary policy.

Why Are Long-Term Interest Rates So Low?

2016 – 36

Michael D. Bauer and Glenn D. Rudebusch | December 5, 2016

Despite recent increases, long-term interest rates remain close to their historical lows. A variety of structural factors, notably slower productivity growth and a surplus of global saving, likely have lowered expectations of steady-state interest rates and pushed down long-term yields through the expectations component. In addition, accommodative monetary policy in the United States and abroad appears to have lowered the term premium on long-term bonds.

TIPS Liquidity and the Outlook for Inflation

2016 – 35

Martin M. Andreasen and Jens H.E. Christensen | November 21, 2016

The prices of special securities known as TIPS can give some insight into how investors view the outlook for future inflation. New research uses a novel term structure model of nominal and real yields to estimate how much the liquidity premium embedded in the prices of these securities have varied over time. Accounting for variation in the premiums notably increases estimates of the inflation expectations underlying market-based measures of inflation compensation, particularly during the most recent financial crisis.

Job-to-Job Transitions in an Evolving Labor Market

2016 – 34

Canyon Bosler and Nicolas Petrosky-Nadeau | November 14, 2016

Job mobility in the United States has been slowing for almost two decades. The most prominent measure of mobility is direct transitions from one job to another. This measure has declined substantially among young workers ages 16 to 24 since the late 1990s, which helps explain the majority of the overall decline in job-to-job transition rates. However, for workers ages 25 and older, the labor market is essentially as dynamic today as it was 20 years ago.

Has the Fed Fallen behind the Curve This Year?

2016 – 33

Fernanda Nechio and Glenn D. Rudebusch | November 7, 2016

At the end of 2015, many forecasters, including some Fed policymakers, projected four hikes in the federal funds rate in 2016. Instead, there have been no increases so far this year. While this shift in Fed policy has puzzled some observers, such a course correction is not unusual from a historical perspective. In addition, given recent changes in economic conditions, the reduced federal funds rate path this year is completely consistent with past Fed behavior.

Trend Job Growth: Where’s Normal?

2016 – 32

Rhys Bidder, Tim Mahedy, and Rob Valletta | October 24, 2016

With the U.S. labor market at or near maximum employment, assessing trend job growth has become increasingly important. This “breakeven” rate, which is the pace of job growth needed to maintain a healthy labor market, depends primarily on growth in the labor force. Estimates that account for population aging and potential labor force participation trends suggest that trend growth ranges between about 50,000 and 110,000 jobs per month. Actual job growth has been well above this pace, implying that it can slow substantially in the future without undermining labor market health.

Consequences of Rising Income Inequality

2016 – 31

Kevin J. Lansing and Agnieszka Markiewicz | October 17, 2016

The increase in U.S. income inequality since 1970 largely reflects gains made by households in the top 20% of the income distribution. Estimates suggest that households outside this group have suffered significant losses from foregone consumption, measured relative to a scenario that holds inequality constant. A substantial mitigating factor for the losses has been the dramatic rise in government redistributive transfers, which have doubled as a share of U.S. output over the same period.

What Is the New Normal for U.S. Growth?

2016 – 30

John Fernald | October 11, 2016

Estimates suggest the new normal for U.S. GDP growth has dropped to between 1½ and 1¾%, noticeably slower than the typical postwar pace. The slowdown stems mainly from demographics and educational attainment. As baby boomers retire, employment growth shrinks. And educational attainment of the workforce has plateaued, reducing its contribution to productivity growth through labor quality. The GDP growth forecast assumes that, apart from these effects, the modest productivity growth is relatively “normal”—in line with its pace for most of the period since 1973.

Clearing the Fog: The Effects of Weather on Jobs

2016 – 29

Catherine van der List and Daniel J. Wilson | October 3, 2016

Understanding how rain, snow, and cold weather affect the economy is important for interpreting economic data. A new study uses county-level data to measure the effect of unseasonable weather on monthly U.S. employment. The resulting estimates quantify how the atypical weather this year explains some of the unexpected fluctuations in hiring at the national level.

Slow Credit Recovery and Excess Returns on Capital

2016 – 28

Zheng Liu and Andrew Tai | September 26, 2016

During the recovery from the Great Recession, real interest rates on government securities have stayed low, but real returns on capital have rebounded. Although this divergence is puzzling in light of standard economic theory, it can be explained by credit market imperfections that raise the cost of capital and depress aggregate investment. The unusually slow credit market recovery is likely to have contributed to the diverging paths of the risk-free rate and returns on capital. It may have also contributed to a slow recovery in investment and output.

Bubbles, Credit, and Their Consequences

2016 – 27

Òscar Jordà, Moritz Schularick, and Alan M. Taylor | September 12, 2016

The collapse of an asset price bubble usually creates a great deal of economic disruption. But bubbles are hard to anticipate and costly to deflate. As a result, policymakers struggle to determine how they should respond, if at all. Evaluating the economic costs of past equity and real estate bubbles—with particular attention to how much credit grew during boom phases—can provide valuable insights for this debate. A recent study finds that equity bubbles are relatively benign. More danger comes from housing bubbles in which credit grows rapidly.

Fed Communication: Words and Numbers

2016 – 26

Fernanda Nechio and Rebecca Regan | September 6, 2016

In response to the global financial crisis, the Federal Reserve relied more heavily on communication to shape expectations. Since 2012 the Fed has released the Summary of Economic Projections reflecting the range of expectations from FOMC meeting participants. Policymakers also deliver speeches to further clarify their views. Using textual analysis to quantify the content of those speeches reveals a somewhat diverse set of views among policymakers. Regardless of the broad range of views, there is a positive relationship between the content of the centermost speech and the median projection for the policy rate.

Projecting the Long-Run Natural Rate of Interest

2016 – 25

Kevin J. Lansing | August 29, 2016

The “natural” rate of interest—the real rate consistent with full use of economic resources and steady inflation near the Fed’s target level—is an important benchmark for monetary policy. Current estimates suggest that this rate is near zero, but it is expected to rise gradually in the years ahead as real GDP returns to its long-run potential. If the historical statistical relationship between the growth rate of potential GDP and the natural rate holds true in the future, then a 2% long-run growth rate would imply a long-run natural rate of around 1%.

Longview: The Economic Outlook

2016 – 24

John C. Williams | August 22, 2016

Despite the very real struggles that some parts of the country, including Alaska, are facing, the broader national economy is in good shape: We’re at full employment, and inflation is well within sight of, and on track to reach, our target. Under these conditions, it makes sense for the Fed to gradually move interest rates toward more normal levels. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Anchorage Economic Development Corporation in Anchorage, Alaska, on August 18.

Monetary Policy in a Low R-star World

2016 – 23

John C. Williams | August 15, 2016

Central banks and governments around the world must be able to adapt policy to changing economic circumstances. The time has come to critically reassess prevailing policy frameworks and consider adjustments to handle new challenges, specifically those related to a low natural real rate of interest. While price level or nominal GDP targeting by monetary authorities are options, fiscal and other policies must also take on some of the burden to help sustain economic growth and stability.

Fed Policy Liftoff and Emerging Markets

2016 – 22

Julia Bevilaqua and Fernanda Nechio | July 18, 2016

Following reports in 2015 that the Federal Reserve would likely begin to raise the short-term policy interest rate—after seven years of near-zero levels—net capital outflows from emerging economies intensified. Many of these countries also experienced large currency depreciations. These developments were similar to those following reports in 2013 about the possible tapering of the Fed’s asset purchases. Furthermore, in both episodes, financial market reactions varied across these developing economies according to each country’s own economic situation.

Fed Communication and the Zero Lower Bound

2016 – 21

Carlos Viana de Carvalho, Eric Hsu, and Fernanda Nechio | July 11, 2016

After the onset of the global financial crisis, the Federal Reserve had to rely on other tools—including communication—to work around the constraints of being unable to lower the federal funds rate below zero. One way to assess how effective these communications were is by estimating how interest rates on bonds with different maturities reacted to Fed communications before and after the zero-bound period. A measure based on news reports of Fed communications suggests that this tool gave the Fed some ability to affect long-term yields through its communications.

Do Macro Variables Help Forecast Interest Rates?

2016 – 20

Michael D. Bauer and James D. Hamilton | June 27, 2016

Some recent research has suggested that macroeconomic variables, such as output and inflation, can improve interest rate forecasts. However, the evidence for this puzzling result is based on unreliable statistical tests. A new simple method more reliably assesses which variables are useful for forecasting. The results from this method suggest that some of the published evidence on the predictive power of macroeconomic variables may be spurious, supporting the more traditional view that current interest rates contain all the relevant information for predicting future interest rates.

Energy’s Impact on Inflation Expectations

2016 – 19

Yifan Cao and Adam Hale Shapiro | June 20, 2016

Some closely watched measures of inflation expectations have been in gradual decline over the past five years. Over the same time, oil prices have fallen dramatically. Although the movements in energy prices are normally considered temporary, they appear to have played a large role in pushing down some longer-term forecasts for consumer price index inflation from professional forecasters. Analysis shows the drop in energy prices can explain about three-fourths of the decline in these professional inflation forecasts over the past five years.

China’s IPO Activity and Equity Market Volatility

2016 – 18

Frank Packer and Mark Spiegel | June 6, 2016

China has recently considered reforming its regulation of initial public offerings in equity markets. Current policy allows more IPOs in rising markets but restricts new issues in falling markets, possibly to avoid pushing down values of existing stocks. However, recent research finds China’s IPO activity has no effect on stock price changes, perhaps because of the low volume relative to the overall market. As such, cyclical restrictions on IPOs do not appear to have stabilized Chinese markets, so policy reforms may improve market efficiency without increasing volatility.

Household Formation among Young Adults

2016 – 17

Fred Furlong | May 19, 2016

The muted housing recovery in recent years can be traced in part to slower household formation among young adults. Analysis suggests that the boom and bust in housing has been a key factor. Recent weakness in household formation relative to population growth among young adults represents a reversal of the unusual strength during the boom years. The net effect has left shares of current young adults heading households at levels similar to those in the mid-1990s before the housing boom.

Economic Outlook: Springtime Is on My Mind

2016 – 16

John C. Williams | May 16, 2016

The labor market looks good, inflation is moving back toward the FOMC’s target, and the economic expansion remains on track. Under these conditions, monetary policy is going back to the basics. Sparking faster growth in the future through innovation and more rapid productivity gains will require investments to build human capital, which is outside the realm of monetary policy. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Sacramento Economic Forum in Sacramento, California, on May 13.

Medicare Payment Cuts Continue to Restrain Inflation

2016 – 15

Jeffrey Clemens, Joshua D. Gottlieb, and Adam Hale Shapiro | May 9, 2016

A steady downward trend in health-care services price inflation over the past decade has been a major factor holding down core inflation. Much of this downward trend reflects lower payments from public insurance programs. Looking ahead, current legislative guidelines imply considerable restraint on future public insurance payment growth. Therefore, overall health-care services price inflation is unlikely to rebound and appears likely to continue to be a drag on inflation.

Aggregation in Bank Stress Tests

2016 – 14

Galina Hale and John Krainer | May 2, 2016

How well stress tests measure a bank’s ability to survive adverse conditions depends on the statistical modeling approach used. Banks can access data on loan characteristics to precisely estimate individual default risk. However, macroeconomic scenarios used for stress tests—as well as the reports banks must provide—are for a bank’s entire portfolio. So, is it better to aggregate the data before or after applying the model? Research suggests a middle-of-the-road approach that applies models to data aggregated at an intermediate level can produce accurate and stable results.

The Elusive Boost from Cheap Oil

2016 – 13

Sylvain Leduc, Kevin Moran, and Robert J. Vigfusson | April 18, 2016

The plunge in oil prices since the middle of 2014 has not translated into a dramatic boost for consumer spending, which has continued to grow moderately. This has been particularly surprising since the sharp drop should free up income for households to use toward other purchases. Lessons from an empirical model of learning suggest that the weak response may reflect that consumers initially viewed cheaper oil as a temporary condition. If oil prices remain low, consumer perceptions could change, which would boost spending.

Data Dependence Awakens

2016 – 12

Benjamin Pyle and John C. Williams | April 8, 2016

Market participants typically update their views on future policy actions based on incoming economic data. However, when interest rates are near zero, monetary policy actions are viewed as less data dependent than in “normal” times. From 2010 to 2014, market expectations of interest rates over the near term exhibited little data dependence. In the past year or so, market-based measures of data dependence have risen considerably, although they are still below earlier norms. This suggests that investors are increasingly viewing monetary policy actions as data dependent.

Differing Views on Long-Term Inflation Expectations

2016 – 11

Jens H.E. Christensen and Jose A. Lopez | April 4, 2016

Persistently low price inflation, falling energy prices, and a strengthening dollar have helped push down market-based measures of long-term inflation compensation over the past two years. The decline in inflation compensation could reflect a lower appetite for risk among investors or decreased market liquidity. A third alternative supported by recent research suggests that the decline reflects lower long-term inflation expectations among investors. Projections indicate the underlying expectations will revert back to typical long-run levels only slowly.

Do Local Bond Markets Help Fight Inflation?

2016 – 10

Andrew K. Rose and Mark M. Spiegel | March 28, 2016

Domestic bond markets allow governments to inflate away their debt obligations. However, they also may create a group of bond holders with the influence and desire to demand lower stable inflation. These competing interests suggest the net impact of creating a local currency bond market on inflation is ambiguous. Recent research finds that the creation of such markets in countries with an inflation target does reduce inflation: Countries with bond markets experience inflation approximately 3 percentage points lower than those without.

How Much Does the EMU Benefit Trade?

2016 – 09

Reuven Glick and Andrew K. Rose | March 21, 2016

The economic benefits of sharing a currency like the euro continue to be debated. In theory, countries that use the same currency face lower trade costs and exchange rate risk and are able to compare prices across borders more easily. These advantages should help increase trade among the economies involved. New estimates suggest that this has been the case in Europe, though perhaps to a lesser degree than previously thought.

Worst-Case Scenarios and Asset Prices

2016 – 08

Rhys Bidder | March 14, 2016

Investors have a hard time accounting for uncertainty when calculating how much risk they are willing to bear. They can use economic models to project future earnings, but many models are misspecified along important dimensions. One method investors appear to use to protect against particularly damaging errors in their model is by projecting worst-case scenarios. The responses to such pessimistic predictions provide insights that can explain many of the puzzles about asset prices.

What’s Up with Wage Growth?

2016 – 07

Mary C. Daly, Bart Hobijn, and Benjamin Pyle | March 7, 2016

While most labor market indicators point to an economy near full employment, a notable exception is the sluggish rise of wages. However, this slow wage growth likely reflects recent cyclical and secular shifts in the composition rather than a weak labor market. In particular, while higher-wage baby boomers have been retiring, lower-wage workers sidelined during the recession have been taking new full-time jobs. Together these two changes have held down measures of wage growth.

Rules of Engagement

2016 – 06

John C. Williams | February 29, 2016

The Federal Reserve uses a number of approaches to inform its policy decisions—they’re all insightful, they’re all useful, and they’re all a part of the debate. But none is absolutely fail-safe. The idea that policymakers should follow only one approach without deviation is ill-advised. An abundance of perspectives is fundamental to the Fed’s success. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to New York University Stern School of Business in New York on February 25.

The Right Profile: Economic Drivers and the Outlook

2016 – 05

John C. Williams | February 22, 2016

Headline news can give false impressions of what motivates monetary policymakers. While international developments and financial market volatility are closely monitored, what matters for policy is how those things affect jobs and inflation. The U.S. economy has had strong job growth, and inflation is low but on course to reach target. The best course remains a gradual pace of policy rate increases. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to Town Hall Los Angeles on February 18.

Is There a Case for Inflation Overshooting?

2016 – 04

Vasco Cúrdia | February 16, 2016

In the wake of the financial crisis, the Federal Reserve dropped the federal funds rate to near zero to bolster the U.S. economy. Recent research suggests that the constraint preventing this rate from being even lower has kept the economy from reaching its full potential. Given the lingering economic slack, allowing inflation to rise temporarily above the Fed’s 2% target might help achieve a better balance between the Fed’s dual mandates of maximum employment and stable prices more quickly.

Will the Economic Recovery Die of Old Age?

2016 – 03

Glenn D. Rudebusch | February 4, 2016

Is the current recovery more likely to end because it’s lasted so long? Have various imbalances and rigidities accumulated to make the economy frailer and more susceptible to a recessionary shock? Recent history suggests the answer is no. Instead, a long recovery appears no more likely to end than a short one. Like Peter Pan, recoveries appear to never grow old.

Changes in Labor Participation and Household Income

2016 – 02

Robert Hall and Nicolas Petrosky-Nadeau | February 1, 2016

The percentage of people active in the labor force has dropped substantially over the past 15 years. Part of this decline appears to be the result of secular factors like the aging of the workforce. However, the participation rate among people in their prime working years—ages 25 to 54—has also fallen. Recent research suggests this decline among prime-age workers can be attributed in large part to lower participation from among the higher-income half of U.S. households.

After the First Rate Hike

2016 – 01

John C. Williams | January 11, 2016

The Federal Reserve has started the process of raising interest rates, in line with ongoing improvement in U.S. economic conditions. The path for subsequent interest rate increases, however, is likely to be shallow compared with past tightening cycles. This reflects in part growing evidence that the new normal for interest rates is lower than in the past. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the California Bankers Association in Santa Barbara, California, on January 8.

Reducing Poverty via Minimum Wages, Alternatives

2015 – 38

David Neumark | December 28, 2015

Setting a higher minimum wage seems like a natural way to help lift families out of poverty. However, minimum wages target individual workers with low wages, rather than families with low incomes. As a result, a large share of the higher income from minimum wages flows to higher-income families. Other policies that directly address low family income, such as the earned income tax credit, are more effective at reducing poverty.

The Effects of Minimum Wages on Employment

2015 – 37

David Neumark | December 21, 2015

The minimum wage has gained momentum among policymakers as a way to alleviate rising wage and income inequality. Much of the debate over this policy centers on whether raising the minimum wage causes job loss, as well as the potential magnitude of those losses. Recent research shows conflicting evidence on both sides of the issue. In general, the evidence suggests that it is appropriate to weigh the cost of potential job losses from a higher minimum wage against the benefits of wage increases for other workers.

Dancing Days Are Here Again: The Long Road Back to Maximum Employment

2015 – 36

John C. Williams | December 7, 2015

The U.S. economy is on the cusp of full health, supported by highly accommodative monetary policy in recent years. The labor market is nearing maximum employment. Inflation remains too low, but measures of its underlying trend suggest that it is not far from the Fed’s 2% target. With real progress toward these goals, the conversation has turned to normalizing policy. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to community leaders in Portland, OR, on December 2.

Global Fallout from China’s Industrial Slowdown

2015 – 35

Mark Spiegel | November 23, 2015

China’s demand for imports helps support the global economic recovery, so China’s recent economic slowdown has caused international concern. China’s slowdown is concentrated in the industrial sector, while its emerging service sector has shown much new strength. However, China’s service sector is relatively closed and relies only modestly on imports. Accordingly, service sector growth is unlikely to offset the adverse implications of a slowing China for global trade.

What’s Different about the Latest Housing Boom?

2015 – 34

Reuven Glick, Kevin J. Lansing, and Daniel Molitor | November 16, 2015

After peaking in 2006, the median U.S. house price fell about 30%, finally hitting bottom in late 2011. Since then, house prices have rebounded strongly and are nearly back to the pre-recession peak. However, conditions in the latest boom appear far less precarious than those in the previous episode. The current run-up exhibits a less-pronounced increase in the house price-to-rent ratio and an outright decline in the household mortgage debt-to-income ratio—a pattern that is not suggestive of a credit-fueled bubble.

Are Wages Useful in Forecasting Price Inflation?

2015 – 33

Rhys Bidder | November 2, 2015

Labor costs constitute a substantial share of business expenses, and it is natural to expect wages to be an important determinant of prices. However, research suggests that wages do not contain much useful information for forecasting price inflation that is not available from other indicators. Therefore, one should not infer too much from recent wage data regarding the future path of inflation.

Why So Slow? A Gradual Return for Interest Rates

2015 – 32

Vasco Cúrdia | October 12, 2015

Short-term interest rates in the United States have been very low since the financial crisis. Projections of the natural rate of interest indicate that a gradual return of short-term interest rates to normal over the next five years is consistent with promoting maximum employment and stable inflation. Uncertainty about the natural rate that is most consistent with an economy at its full potential suggests that the pace of normalization may be even more gradual than implied by these projections.

The Economic Outlook: Live Long and Prosper

2015 – 31

John C. Williams | October 5, 2015

The recent Federal Open Market Committee decision to hold off on raising interest rates reflected conflicting signals, with favorable U.S. economic conditions offset by downside risks from abroad. However, the economy continues to make progress toward achieving the FOMC’s goals. If developments stay on track, the process of monetary policy normalization is likely to start later this year. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the UCLA Anderson School of Management in Los Angeles on September 28, 2015.

Can We Rely on Market-Based Inflation Forecasts?

2015 – 30

Michael D. Bauer and Erin McCarthy | September 21, 2015

A substantial decline in market-based measures of inflation expectations has raised concerns about low future inflation. An important question to address is whether these measures contain information that can improve upon alternative forecasting methods. This analysis finds that market-based inflation forecasts generally are no more accurate than surveys of professional forecasters or simple forecast rules. This suggests that financial markets can provide little additional useful forward-looking information about inflation.

Assessing Supervisory Scenarios for Interest Rate Risk

2015 – 29

Jens H.E. Christensen and Jose A. Lopez | September 8, 2015

A new proposal by the Basel Committee on Banking Supervision for setting the amount of capital banks must hold against potential losses from interest rate risk uses only a few, very stylized scenarios. Analysis shows the proposed scenarios are extremely unlikely to occur. While they may be appropriate for setting bank capital guidelines, they are much less relevant for everyday risk management. Instead, using a modeling framework with a plausible range of interest rate scenarios would be more relevant to help banks manage their interest rate risk.

Measuring Monetary Policy’s Effect on House Prices

2015 – 28

John C. Williams | August 31, 2015

Central banks debate whether using monetary policy to foster financial stability through house prices is advisable. Although a rise in interest rates tends to lower house prices, it may come at a significant cost through reduced economic output and inflation. This implies a very costly tradeoff when macroeconomic and financial stability goals are in conflict. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Bank Indonesia–BIS Conference in Jakarta on August 20.

Residual Seasonality and Monetary Policy

2015 – 27

Glenn D. Rudebusch, Daniel J. Wilson, and Benjamin Pyle | August 24, 2015

Much recent discussion has suggested that the official real GDP data are inadequately adjusted for recurring seasonal fluctuations. A similar pattern of insufficient seasonal adjustment also affects the published data for a key measure of price inflation. Still, such residual seasonality in the published output and inflation statistics is unlikely to mislead Federal Reserve policymakers or adversely affect the setting of monetary policy.

Is China’s Growth Miracle Over?

2015 – 26

Zheng Liu | August 10, 2015

The recent slowdown in China’s growth has caused concern about its long-term growth prospects. Evidence suggests that, before 2008, China’s growth miracle was driven primarily by productivity improvement following economic policy reforms. Since 2008, however, growth has become more dependent on investment and overall growth has slowed. If the recent reform plans can successfully address the country’s structural imbalances, China could maintain a solid growth rate that might help smooth its transition to high-income status.

Interest Rates and House Prices: Pill or Poison?

2015 – 25

Òscar Jordà, Moritz Schularick, and Alan M. Taylor | August 3, 2015

Policymakers disagree over whether central banks should use interest rates to curb leverage and asset price booms. Higher interest rates make mortgages more expensive and could prevent borrowers from bidding up house prices to create a boom. However, rough calculations show that the size of rate increase needed to do so might also boost unemployment and push down inflation. Thus, using this type of policy tool may cause the central bank to deviate significantly from its goals of full employment and price stability.

Assessing the Recent Behavior of Inflation

2015 – 24

Kevin J. Lansing | July 20, 2015

Inflation has remained below the FOMC’s long-run target of 2% for more than three years. But this sustained undershooting does not yet signal a statistically significant departure from the target once the volatility of the 12-month mean inflation rate is taken into account. Furthermore, the empirical Phillips curve relationship that links inflation to the size of production or employment gaps has been roughly stable since the early 1990s. Hence, continued improvements in production and employment relative to their long-run trends would be expected to put upward pressure on inflation.

The Recovery’s Final Frontier?

2015 – 23

John C. Williams | July 13, 2015

The U.S. economy is looking quite good. Growth is on a solid trajectory, and the FOMC’s maximum employment goal is in sight. Risks from abroad are unlikely to overturn strong U.S. fundamentals. Still, the exact timing of an initial interest rate increase will depend on convincing evidence that inflation is heading back toward target. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the International Conference of Commercial Bank Economists in Los Angeles on July 8.

Finding Normal: Natural Rates and Policy Prescriptions

2015 – 22

Mary C. Daly, Fernanda Nechio, and Benjamin Pyle | July 6, 2015

Over the past several years, the Federal Open Market Committee’s longer-run forecasts of the short-term interest rate and unemployment rate have steadily declined. These forecasts reflect the Committee’s views about the levels of the policy interest rate and unemployment rate that will eventually prevail when the economy returns to normal. A simple monetary policy rule illustrates how the reductions in these forecasts can imply a lower projected path for the policy rate.

The Stimulative Effect of Redistribution

2015 – 21

Bart Hobijn and Alexander Nussbacher | June 29, 2015

Policymakers often consider temporarily redistributing income from rich to poor households to stimulate the economy. This is based in part on the idea that poor households spend a larger share of their income than rich ones do. However, ample evidence suggests that the difference in spending between these groups is significantly smaller than commonly assumed. A second assumption is that redistribution through policy is more efficient than through capital markets. Whether this is true is important to consider when proposing this type of stimulus policy.

Transmission of Asset Purchases: The Role of Reserves

2015 – 20

Jens H.E. Christensen and Signe Krogstrup | June 22, 2015

The Swiss National Bank expanded bank reserves as part of its unconventional monetary policy during the European sovereign debt crisis. The unprecedented expansion involved short-term rather than long-term asset purchases. This approach provides novel insights into how central bank balance sheet expansions affect interest rates. In particular, it illustrates how an expansion of reserves can lower long-term yields through a reserve-induced portfolio balance effect that is independent of the assets purchased.

Involuntary Part-Time Work: Here to Stay?

2015 – 19

Rob Valletta and Catherine van der List | June 8, 2015

The incidence of involuntary part-time work surged during the Great Recession and has stayed unusually high during the recovery. This may reflect more labor market slack than is captured by the unemployment rate alone. Analysis across states and over time indicates that a substantial part of the increase is related to the business cycle. However, structural factors such as changes in industry composition, population demographics, and labor costs have also contributed. This suggests that involuntary part-time work may remain significantly above its pre-recession level as the labor market continues to recover.

Macroprudential Policy in a Microprudential World

2015 – 18

John C. Williams | June 1, 2015

Events of the past decade have refocused attention on the potential contributions of monetary policy and macroprudential approaches to fostering financial stability. However, monetary policy is poorly suited for dealing with financial stability concerns. Instead, given the scarcity of explicit macroprudential tools in the United States, microprudential regulations and supervision are used to achieve macroprudential goals. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Symposium on Asian Banking and Finance in Singapore May 28.

Looking Forward: The Path for Monetary Policy

2015 – 17

John C. Williams | May 26, 2015

The U.S. economy is on solid footing. The labor market is nearing full employment, and inflation should move back toward the Federal Open Market Committee’s target. A likely gradual removal of highly accommodative monetary policy could begin at any upcoming FOMC meeting. However, the exact timing will be driven by the incoming data. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the New York Association for Business Economics in New York on May 12.

The Puzzle of Weak First-Quarter GDP Growth

2015 – 16

Glenn D. Rudebusch, Daniel Wilson, and Tim Mahedy | May 18, 2015

The official estimate of real GDP growth for the first three months of 2015 was shockingly weak. However, such estimates in the past appear to have understated first-quarter growth fairly consistently, even though they are adjusted to try to account for seasonal patterns. Applying a second round of seasonal adjustment corrects this residual seasonality. After this correction, aggregate output grew much faster in the first quarter than reported.

Monetary Policy and the Independence Dilemma

2015 – 15

John C. Williams | May 11, 2015

The dilemma of central bank independence has been around a long time. Past attempts to solve it through an operational mandate such as the gold standard have proven ineffective. The alternative approach of achieving economic goals through reliance on a fixed policy rule also poses practical challenges. A more promising path is to enhance accountability and transparency within an existing goal mandate framework. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to Chapman University in Orange, California, on May 1.

Is Transition to Inflation Targeting Good for Growth?

2015 – 14

Galina Hale and Alexej Philippov | May 1, 2015

Inflation targeting is often considered the most appropriate monetary policy framework for central banks seeking price stability. While a target can help stabilize inflation, the implications for a country’s growth are less clear. Advanced economies experienced higher economic growth immediately following the transition to inflation targeting. However, developing economies experienced only modest gains that were close to their trend growth. One explanation is that transitioning to a low-inflation regime can be more costly for less stable countries that have higher inflation expectations and less credible policies.

Did Massachusetts Health-Care Reform Affect Prices?

2015 – 13

Adam Hale Shapiro | April 20, 2015

The 2006 health-care reform in Massachusetts relied heavily on the private insurance market. Recent evidence shows that the reform boosted payments to physicians from private insurers by 13% relative to other areas. This increase began immediately before the reform became law, suggesting that insurers raised payments in anticipation of the change. The reform may have also caused the state’s insurance premiums to fall. Overall, evidence suggests that the Massachusetts health-care reform shifted dollars away from insurers and towards providers and consumers.

Optimal Policy and Market-Based Expectations

2015 – 12

Michael D. Bauer and Glenn D. Rudebusch | April 13, 2015

Financial market prices contain valuable information about investors’ views regarding future interest rates, inflation, and other economic variables. However, such market-based expectations can be hard to interpret because changes in risk and liquidity premiums also affect asset prices. In practice, policymakers should be cautious in relying on the expectations information in market prices.

Have Long-Term Inflation Expectations Declined?

2015 – 11

Fernanda Nechio | April 6, 2015

Based on surveys of professional forecasters, expectations for price inflation 5 to 10 years ahead have edged down over the past few years. This decline seems to be primarily driven by revised expectations from forecasters who overestimated inflation in the aftermath of the Great Recession. Currently, the median survey-based expectation for long-term inflation is close to its pre-recession level and appears well anchored at the Fed’s 2% longer-run inflation objective.

Majority of Hires Never Report Looking for a Job

2015 – 10

Carlos Carrillo-Tudela, Bart Hobijn, Patryk Perkowski, and Ludo Visschers | March 30, 2015

Every month, millions of workers search for new jobs although they already have one. About one-tenth of these searchers switch employers in the following month. However, most of the job switchers in the United States never reported having looked for a job. This implies that, rather than those workers finding jobs, the jobs actually found them.

Mortgaging the Future?

2015 – 09

Òscar Jordà, Moritz Schularick, and Alan M. Taylor | March 23, 2015

In the six decades following World War II, bank lending measured as a ratio to GDP has quadrupled in advanced economies. To a great extent, this unprecedented expansion of credit was driven by a dramatic growth in mortgage loans. Lending backed by real estate has allowed households to leverage up and has changed the traditional business of banking in fundamental ways. This “Great Mortgaging” has had a profound influence on the dynamics of business cycles.

The View from Here: Outlook and Monetary Policy

2015 – 08

John C. Williams | March 9, 2015

The U.S. economy is likely to reach the Federal Reserve’s maximum employment goal later this year. Although inflation has remained persistently low, it is expected to return to the Fed’s 2% target over the next few years. Due to the lags between monetary policy’s implementation and its effects, the time is coming to take the first step toward normalizing monetary policy by raising short-term interest rates. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the CFA Society Hawaii on March 5, 2015.

Do Place-Based Policies Matter?

2015 – 07

David Neumark and Helen Simpson | March 2, 2015

Place-based policies such as enterprise zones offer economic incentives to firms to create jobs in economically challenged areas. Evidence on the effectiveness of enterprise zones is mixed. There is no clear indication that they successfully create jobs. However, positive effects are evident for other policies, including discretionary subsidies that target specific firms, infrastructure spending that targets specific areas, and investment in higher education and university research.

Competing for Jobs: Local Taxes and Incentives

2015 – 06

Daniel J. Wilson | February 23, 2015

State and local governments frequently offer tax incentives to attract businesses to locate in their area. Proponents view these incentives as a valuable tool to encourage economic development. Critics, on the other hand, argue either that incentives have little effect on business location decisions—and hence are wasteful giveaways—or that their benefits come at the expense of reduced economic activity in other areas. A key element in this debate is distinguishing what is best from a local versus a national perspective.

Animal Spirits and Business Cycles

2015 – 05

Rhys Bidder | February 17, 2015

Animal spirits are often suggested as a cause of business cycles, but they are very difficult to define. Recent research proposes a novel explanation based on the changing level of risk over time and people’s uncertainty about how the world works. The interaction of these two can lead to significant business cycle fluctuations in response to spikes in volatility. This finding gives researchers an alternative to irrational behavior as an explanation for why swings in consumer sentiment appear to drive the business cycle.

The Recent Rise and Fall of Rapid Productivity Growth

2015 – 04

John Fernald and Bing Wang | February 9, 2015

Information technology fueled a surge in U.S. productivity growth in the late 1990s and early 2000s. However, this rapid pace proved to be temporary, as productivity growth slowed before the Great Recession. Furthermore, looking through the effects of the economic downturn on productivity, the reduced pace of productivity gains has continued and suggests that average future output growth will likely be relatively slow.

Persistent Overoptimism about Economic Growth

2015 – 03

Kevin J. Lansing and Benjamin Pyle | February 2, 2015

Since 2007, Federal Open Market Committee participants have been persistently too optimistic about future U.S. economic growth. Real GDP growth forecasts have typically started high, but then are revised down over time as the incoming data continue to disappoint. Possible explanations for this pattern include missed warning signals about the buildup of imbalances before the crisis, overestimation of the efficacy of monetary policy following a balance-sheet recession, and the natural tendency of forecasters to extrapolate from recent data.

Higher Education, Wages, and Polarization

2015 – 02

Rob Valletta | January 12, 2015

The earnings gap between people with a college degree and those with no education beyond high school has been growing since the late 1970s. Since 2000, however, the gap has grown more for those who have earned a post-graduate degree as well. The divergence between workers with college degrees and those with graduate degrees may be one manifestation of rising labor market polarization, which benefits those earning the highest and the lowest wages relatively more than those in the middle of the wage distribution.

Why Is Wage Growth So Slow?

2015 – 01

Mary C. Daly and Bart Hobijn | January 5, 2015

Despite considerable improvement in the labor market, growth in wages continues to be disappointing. One reason is that many firms were unable to reduce wages during the recession, and they must now work off a stockpile of pent-up wage cuts. This pattern is evident nationwide and explains the variation in wage growth across industries. Industries that were least able to cut wages during the downturn and therefore accrued the most pent-up cuts have experienced relatively slower wage growth during the recovery.

Global Aging: More Headwinds for U.S. Stocks?

2014 – 38

Zheng Liu, Mark M. Spiegel, and Bing Wang | December 22, 2014

The retirement of the baby boomers is expected to severely cut U.S. stock values in the near future. Since population aging is widespread across the world’s largest countries, this raises the question of whether global aging could adversely affect the U.S. equity market even further. However, the strong relationship between demographics and equity values in this country do not hold true in other industrial countries. This suggests that global aging is unlikely to create additional headwinds for U.S. equities.

Innovation and Incentives: Evidence from Biotech

2014 – 37

Enrico Moretti and Daniel J. Wilson | December 8, 2014

Financial incentives from state governments are part of a growing trend of policies designed to spur innovation clusters in specific regions. Biotechnology industry clusters in particular have benefited from these subsidies, which have boosted the number of star biotech scientists in those states by roughly 15%. Likewise, the number of biotech jobs overall has grown in states that offered incentives, although they have had little impact on salaries. Incentives have also spilled over to generate sizable effects in local service sectors.

Mixed Signals: Labor Markets and Monetary Policy

2014 – 36

Canyon Bosler, Mary C. Daly, and Fernanda Nechio | December 1, 2014

Since the Great Recession, standard ways of measuring the labor market have given mixed signals about the strength of the U.S. recovery. This has increased the uncertainty around how to interpret job market conditions, which has made calibrating monetary policy to achieve full employment more challenging. Ultimately, policymakers need to make judgments about how much these conflicting indicators reflect cyclical weakness in the job market versus structural factors that would be less easily remedied with monetary policy.

Monetary Policy When the Spyglass Is Smudged

2014 – 35

Early Elias, Helen Irvin, and Òscar Jordà | November 24, 2014

An accurate measure of economic slack is key to properly calibrate monetary policy. Two traditional gauges of slack have become harder to interpret since the Great Recession: the gap between output and its potential level, and the deviation of the unemployment rate from its natural rate. As a consequence, conventional policy rules based on these measures of slack generate wide-ranging policy rate recommendations. This variability highlights one of the challenges policymakers currently face.

The Risks to the Inflation Outlook

2014 – 34

Vasco Cúrdia | November 17, 2014

Although inflation is currently low, some commentators fear that continued highly accommodative monetary policy may lead to a surge in inflation. However, projections that account for the different policy tools used by the Federal Reserve suggest that inflation will remain low in the near future. Moreover, the relative odds of low inflation outweigh those of high inflation, which is the opposite of historical projections. An important factor continuing to hold down inflation is the persistent effects of the financial crisis.

Does Slower Growth Imply Lower Interest Rates?

2014 – 33

Sylvain Leduc and Glenn D. Rudebusch | November 10, 2014

Over the past two years, both monetary and fiscal policy projections have been based on the view that declines in the long-run potential growth rate of the economy will in turn push down interest rates. In contrast, examination of private-sector professional forecasts and historical data provides little evidence of such a linkage. This suggests a greater risk that future interest rates may be higher than expected.

Housing Market Headwinds

2014 – 32

John Krainer and Erin McCarthy | November 3, 2014

The housing sector has been one of the weakest links in the economic recovery, and the latest data continue to show only modest improvement. One obstacle to a pickup in housing demand has been tight mortgage credit standards. Indeed, loan standards for borrowers with lower credit scores have shown few signs of easing. Still, as the share of new mortgages financed in the private market has started to rise, access to credit may improve.

Navigating toward Normal: The Future for Policy

2014 – 31

John C. Williams | October 20, 2014

The Federal Reserve is on track to end asset purchases in the near future and has laid the groundwork for its plan to eventually normalize monetary policy by raising short-term interest rates. The process of policy normalization is unlikely to start soon, however, and its exact timing will depend on further improvements in unemployment, wages, and inflation. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to business and community leaders in Las Vegas, Nevada, on October 9, 2014.

Has China’s Economy Become More “Standard”?

2014 – 30

John G. Fernald, Eric Hsu, and Mark M. Spiegel | October 6, 2014

Financial liberalization in China has broad implications, including changing how its central bank’s monetary policy affects the nation’s economy. An estimate of Chinese economic activity and inflation based on a broad set of indicators suggests that the way policy is transmitted to China’s economy has become more like Western market economies in the past decade. Although Chinese monetary policy may actually have exacerbated its economic downturn during the global financial crisis, a move toward stimulatory policy has helped ease its slower growth more recently.

Options-Based Expectations of Future Policy Rates

2014 – 29

Michael Bauer | September 29, 2014

Forecasts of short-term interest rates that are based on futures rates in financial markets can be very misleading when the policy rate is near the zero lower bound. By contrast, options on future short-term interest rates can provide more accurate projections. Currently these options suggest that the federal funds rate—the Federal Reserve’s key monetary policy interest rate—is most likely to lift off from zero around mid-2015 and rise only slowly afterwards at a pace of about 1 percentage point per year.

How Much Do Medicare Cuts Reduce Inflation?

2014 – 28

Jeffrey Clemens, Joshua D. Gottlieb, and Adam Hale Shapiro | September 22, 2014

Because the health sector makes up a large share of the U.S. economy, widespread price changes for medical services can impact overall inflation significantly. Cuts to public health-care spending spill over directly and indirectly to private spending. A recent estimate suggests the full effect of the Medicare payment cuts from the 2011 Budget Control Act resulted in a decline of 0.24 percentage point in the overall personal consumption expenditures price index. This is over twice the expected drop if private-sector spillovers are not included.

Assessing Expectations of Monetary Policy

2014 – 27

Jens H.E. Christensen and Simon Kwan | September 8, 2014

An ongoing concern has been that the public might misconstrue the Fed’s forward guidance about future monetary policy and underappreciate the extent to which short-term interest rates may vary with future news about the economy. Evidence based on surveys, market expectations, and model estimates show that the public seems to expect a more accommodative policy than Federal Open Market Committee participants. The public also may be less uncertain about these forecasts than policymakers.

Prospects for Asia and the Global Economy:
 Conference Summary

2014 – 26

Reuven Glick and Mark M. Spiegel | September 2, 2014

A new volume, Prospects for Asia and the Global Economy, summarizes the 2013 Asia Economic Policy Conference hosted by the Federal Reserve Bank of San Francisco’s Center for Pacific Basin Studies. The conference focused on challenges faced by policymakers in advanced and emerging economies as they continue to recover from the recent global financial crisis. Issues discussed included the monetary policy spillovers from advanced economies to emerging markets, the costs and benefits of foreign reserve accumulation, and the desirability of macroprudential interventions, restrictions on cross-border capital flows, and financial regulatory reforms to reduce the likelihood of future crises.

Fueling Road Spending with Federal Stimulus

2014 – 25

Sylvain Leduc and Dan Wilson | August 25, 2014

Highway spending in the United States between 2008 and 2011 was flat, despite the serious need for improvements and the big boost to state highway funds from the Recovery Act of 2009. A comparison of how much different states received and spent shows that these federal grants actually boosted highway spending substantially. However, this was offset by pressures to reduce state highway spending due to plummeting tax revenues. In fact, analysis suggests national highway spending would have fallen roughly 20% over this period without federal highway grants from the Recovery Act.

Home Currency Issuance in Global Debt Markets

2014 – 24

Galina B. Hale, Peter Jones, and Mark M. Spiegel | August 18, 2014

Historically, businesses in most countries have not been able to sell bonds denominated in their home currencies to foreign investors. In recent decades this trend has been changing. Research shows that bonds denominated in currencies other than the major global currencies have increased, particularly following the global financial crisis. However, not all countries were affected equally. Countries that were able to take advantage of the temporary disruption and near-zero interest rates in global financial markets were the ones with a combination of low government debt and a history of stable inflation.

Long Road to Normal for Bank Business Lending

2014 – 23

Simon Kwan | August 4, 2014

Following the 2007–09 financial crisis, bank lending to businesses plummeted. Five years later, the dollar amount of bank commercial and industrial lending has finally surpassed the previous peak. However, despite very accommodative monetary policy and abundant excess reserves in the banking system, the spread of the commercial loan interest rates over the target federal funds rate remains above its long-run average. This suggests that business loans are not yet cheap relative to banks’ funding cost.

The Wage Growth Gap for Recent College Grads

2014 – 22

Bart Hobijn and Leila Bengali | July 21, 2014

Median starting wages of recent college graduates have not kept pace with median earnings for all workers over the past six years. This type of gap in wage growth also appeared after the 2001 recession and closed only late in the subsequent labor market recovery. However the wage gap in the current recovery is substantially larger and has lasted longer than in the past. The larger gap represents slow growth in starting salaries for graduates, rather than a shift in types of jobs, and reflects continued weakness in the demand for labor overall.

Bank Counterparties and Collateral Usage

2014 – 21

Hamed Faquiryan and Marius Rodriguez | July 14, 2014

The 2007–09 financial crisis drew attention to the nature and consequences of connections among financial firms. New reporting standards set in the wake of the crisis have shed more light on these ties in current financial markets. New data are available on the magnitude of risk exposure and the types of collateral that link bank holding companies with their trading partners in over-the-counter derivatives markets. The data show that both the level of risk and diversity of collateral involved in these contracts vary widely depending on the type of counterparties.

Slow Business Start-ups and the Job Recovery

2014 – 20

Liz Laderman and Sylvain Leduc | July 7, 2014

Start-ups typically create jobs so fast at the beginning of recoveries that even a modest drop in that pace can affect the whole economy. In fact, slower job growth among new businesses may have resulted in 760,000 fewer jobs in the first year of the current recovery. Because housing wealth is an important factor in the financing of new businesses, lower house prices may have been partly to blame for the slower growth. Conversely, recently increasing house prices may already be boosting start-up growth and, with it, overall job growth.

Will Inflation Remain Low?

2014 – 19

Yifan Cao and Adam Shapiro | June 30, 2014

The well-known Phillips curve suggests that future inflation depends on current and past inflation and a measure of economic slack or resource utilization. Using the unemployment gap to measure slack, a simple Phillips curve currently predicts that inflation will remain quite low through 2015. Two variations of the model, which impose a higher anchor for inflation expectations or focus only on a short-term unemployment gap, still predict that inflation will remain low, albeit higher than implied by the basic model.

Household Expectations and Monetary Policy

2014 – 18

Carlos Carvalho and Fernanda Nechio | June 23, 2014

Helping the public understand how monetary policy is conducted is an important goal for the Federal Reserve. One way to measure people’s understanding is through surveys that show household expectations for the economy. Responses from the Michigan survey show some groups of households appear to hold beliefs consistent with basic features of U.S. policy. In particular, households with higher incomes and more education appear to better grasp how interest rates relate to inflation and unemployment, particularly during times of labor market weakness.

Financial Stability and Monetary Policy: Happy Marriage or Untenable Union?

2014 – 17

John C. Williams | June 9, 2014

The very real and sizable costs of using monetary policy to deal with risks to financial stability—along with the uncertain benefits of doing so—argues for finding alternative tools with more favorable tradeoffs. Policymakers should study ways to design policy frameworks that support financial stability, with only a modest cost to macroeconomic goals and anchoring inflation expectations. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the conference “Housing Markets and the Macroeconomy: Challenges for Monetary Policy and Financial Stability” in Eltville am Rhein, Germany, on June 5, 2014.

The Economic Recovery and Monetary Policy: The Road Back to Ordinary

2014 – 16

John C. Williams | June 2, 2014

Monetary policy is moving slowly and cautiously towards normalization. Signs of improvement—falling unemployment, better financial conditions, and abating headwinds—indicate the United States is changing from extraordinary economic times back to ordinary ones. Risks to the recovery’s momentum linger, and “normalizing” should not be confused with “tightening.” Monetary policy will remain highly accommodative for some time. Overall, however, the outlook is positive. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Association of Trade and Forfaiting in the Americas in San Francisco on May 22, 2014.

The Slowdown in Existing Home Sales

2014 – 15

John Krainer | May 19, 2014

Sales of existing homes slowed noticeably over the second half of 2013, reflecting a more drawn-out recovery than expected for housing markets. A main reason for the slowdown is higher mortgage rates that have made financing more costly nationwide. Sales appear to be slowing even more in distressed markets, where real estate investors had bought up single-family homes to convert into rental properties following the housing bust. Evidence suggests that investors may be retreating from these markets as housing valuations rise.

Financial Market Outlook for Inflation

2014 – 14

Michael D. Bauer and Jens H. E. Christensen | May 12, 2014

Prices of special financial instruments called inflation derivatives can provide valuable insight into investors’ views of future inflation. Projections from inflation swap rates suggest inflation will remain low for some time and return only slowly to levels consistent with the Federal Reserve’s notion of price stability. Inflation caps and floors give evidence that investors seem less uncertain about inflation forecasts than in recent years, and that they perceive a favorable inflation outcome as increasingly likely.

Is It Still Worth Going to College?

2014 – 13

Mary C. Daly and Leila Bengali | May 5, 2014

Earning a four-year college degree remains a worthwhile investment for the average student. Data from U.S. workers show that the benefits of college in terms of higher earnings far outweigh the costs of a degree, measured as tuition plus wages lost while attending school. The average college graduate paying annual tuition of about $20,000 can recoup the costs of schooling by age 40. After that, the difference between earnings continues such that the average college graduate earns over $800,000 more than the average high school graduate by retirement age.

Interpreting Deviations from Okun’s Law

2014 – 12

Mary C. Daly, John Fernald, Òscar Jordà, and Fernanda Nechio | April 21, 2014

The traditional relationship between unemployment and output growth known as Okun’s law appeared to break down during the Great Recession. This raised the question of whether this rule of thumb was still meaningful as a forecasting tool. However, recent revisions to GDP data show that its relation with unemployment followed a fairly typical cyclical pattern compared with past deep recessions and slow recoveries. The comparatively common patterns suggest that rumors of the death of Okun’s law during the Great Recession were greatly exaggerated.

How Important Are Hedge Funds in a Crisis?

2014 – 11

Reint Gropp | April 14, 2014

Before the 2007–09 crisis, standard risk measurement methods substantially underestimated the threat to the financial system. One reason was that these methods didn’t account for how closely commercial banks, investment banks, hedge funds, and insurance companies were linked. As financial conditions worsened in one type of institution, the effects spread to others. A new method that more accurately accounts for these spillover effects suggests that hedge funds may have been central in generating systemic risk during the crisis.

Age Discrimination and the Great Recession

2014 – 10

David Neumark and Patrick Button | April 7, 2014

The Great Recession led to large increases in unemployment rates and unemployment durations for workers of all ages, but durations rose far more for older workers than for younger workers. This difference was apparent both during and after the recession, fueling speculation that age discrimination played a role. Research indicates that in states with stronger age discrimination protections, older-worker unemployment durations increased more relative to increases for younger workers. This suggests that state age discrimination laws may need to be modified to strengthen protections during downturns.

Career Changes Decline during Recessions

2014 – 09

Carlos Carrillo-Tudela, Bart Hobijn, and Ludo Visschers | March 31, 2014

Some types of jobs lost during recessions are never recovered, which suggests some unemployed workers must change careers. However, data on hiring during recessions shows the fraction of unemployed workers who change their industry or occupation declines rather than increases. This reflects in part that, when unemployment is high, employers can find applicants with qualifications that closely match job openings. Thus, the rate of overall job growth affects the pace of job market recoveries more than the need for workers to reallocate across sectors.

Stress Testing the Fed

2014 – 08

Jens H.E. Christensen, Jose A. Lopez, and Glenn D. Rudebusch | March 24, 2014

The Federal Reserve has purchased a large amount of longer-term bonds since December 2008. While these purchases have helped support a strengthening economy, the Fed’s resulting financial position may incur significant declines in bond values and net income when interest rates rise. However, analyzing a range of possible future interest rate scenarios—and their associated probabilities—shows that potential losses associated with these declines are very likely to be manageable.

Private Credit and Public Debt in Financial Crises

2014 – 07

Òscar Jordà, Moritz Schularick, and Alan M. Taylor | March 10, 2014

Recovery from a recession triggered by a financial crisis is greatly influenced by the government’s fiscal position. A financial crisis puts considerable stress on the government’s budget, sometimes triggering attacks on public debt. Historical analysis shows that a private credit boom raises the odds of a financial crisis. Entering such a crisis with a swollen public debt may limit the government’s ability to respond and can result in a considerably slower recovery.

Fed Tapering News and Emerging Markets

2014 – 06

Fernanda Nechio | March 3, 2014

In 2013, the Federal Reserve publicly described conditions for scaling back and ultimately ending its highly accommodative monetary policy. Some emerging market countries subsequently experienced sharp reversals of capital inflows, resulting in sizable currency depreciation. But others did not. Variations in financial market reactions from one country to another appear to have been related to differences in economic conditions, which partly reflected a country’s policies before the Fed’s tapering comments.

State Hiring Credits and Recent Job Growth

2014 – 05

David Neumark and Diego Grijalva | February 24, 2014

In response to job losses associated with the Great Recession, a number of states adopted hiring credits to encourage employers to create jobs. These credits provide tax breaks to employers that create jobs or expand payrolls, with the aim of increasing hiring by reducing labor costs. The evidence on their effects is mixed, although some of these credits appear to have succeeded in boosting job growth.

When Will the Fed End Its Zero Rate Policy?

2014 – 04

Jens Christensen | February 10, 2014

U.S. Treasury yields and other interest rates increased in the months leading up to the Federal Reserve’s December 2013 decision to cut back its large-scale bond purchases. This increase in rates probably at least partly reflected changes in what bond investors expected regarding future monetary policy. Recent research on this episode tentatively suggests that investors moved earlier the date when they believed the Fed would exit its zero interest rate policy, even though Fed policymakers made few changes in their projections of appropriate monetary policy.

Job Uncertainty and Chinese Household Savings

2014 – 03

Zheng Liu | February 3, 2014

China’s household saving rate has risen substantially during the past two decades. Research suggests that increased job uncertainty following reforms and massive layoffs in state-owned enterprises during the late 1990s contributed significantly to the increase. Facing higher unemployment risks after the reforms, workers in state-owned enterprises have tended to save more as a precaution. A recent study estimates that precautionary saving driven by the reforms explains about a third of Chinese urban household wealth accumulation from 1995 to 2002.

Housing, Banking, and the Recovery: The Outlook

2014 – 02

John C. Williams | January 13, 2014

The economic outlook is increasingly positive, boosted by housing, banking, and labor market improvements. While the Federal Reserve recently eased its bond-buying program, indicating monetary policy is on the path back to normal, full normalization will take time and be based on economic data. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to Lambda Alpha International and the Arizona Bankers Association in Phoenix, Arizona, on January 7, 2014.

Drivers of Mortgage Choices by Risky Borrowers

2014 – 01

Fred Furlong, David Lang, and Yelena Takhtamanova | January 6, 2014

During the past decade’s housing boom, borrowers with lower credit ratings were more likely than higher-rated borrowers to choose adjustable-rate mortgages. This raises the question of whether, amid rapidly rising house prices, lower-rated borrowers paid less attention to loan pricing and interest-rate-related factors. However, even accounting for house price appreciation, research shows these borrowers were as, if not more, responsive as higher-rated borrowers to changes in interest-rate-related fundamentals. Their tendency to choose adjustable-rate mortgages is consistent with mortgage decisions based on economic considerations, rather than just lack of financial sophistication.

Labor Markets in the Global Financial Crisis

2013 – 38

Mary C. Daly, John Fernald, Òscar Jordà, and Fernanda Nechio | December 23, 2013

The impact of the global financial crisis on labor markets varied widely from country to country. In the United States, the unemployment rate nearly doubled from its pre-recession level. The rate rose much less in the United Kingdom and barely changed in Germany, despite larger declines in gross domestic product. Institutional and technological changes since the 1970s had previously made relationships between output and unemployment more homogeneous across countries. But the global financial crisis undid much of this convergence as countries adopted different labor market policies to adjust output.

Why Do Measures of Inflation Disagree?

2013 – 37

Yifan Cao and Adam Hale Shapiro | December 9, 2013

Inflation as measured by the personal consumption expenditures price index is near historical low levels, below the Federal Reserve’s 2% longer-run goal. Another common inflation measure, the consumer price index, is also historically low, but remains closer to 2%. The recent gap between these two measures is due largely to the cost of shelter, which makes up a larger proportion of the CPI consumption basket. Based on history, the gap between the two inflation measures should close at a rate of 0.05 percentage point per month.

Taxes, Transfers, and State Economic Differences

2013 – 36

Israel Malkin and Daniel J. Wilson | December 2, 2013

Taxes collected by the U.S. government are paid out through transfers that promote economic equity among states. This system redistributes funds between richer and poorer states over the long run and helps stabilize states hit by temporary economic shocks. Surprisingly, little if any of this redistribution and stabilization comes from transfer payments through federal programs and services. Rather, differences across states in federal tax payments drive these effects. Research suggests a similar system of taxes and transfers in the European Union could have reduced recent economic divergence among member states.

Consumer Inflation Views in Three Countries

2013 – 35

Bharat Trehan and Maura Lynch | November 25, 2013

Financial markets and professional forecasters expect central banks to hit their inflation targets. But U.S., British, and Japanese consumers expect inflation to be higher. Data suggest that consumers in these countries don’t pay attention to central bank inflation targets and react sluggishly to persistent shifts in the inflation rate. However, the price of oil apparently influences inflation expectations strongly. It’s possible that consumers use highly volatile oil prices in a rule of thumb for updating their inflation expectations.

Expectations for Monetary Policy Liftoff

2013 – 34

Michael D. Bauer and Glenn D. Rudebusch | November 18, 2013

The Federal Reserve has indicated that it may raise the federal funds rate from its current value near zero in 2015. This forward policy guidance is broadly consistent with expectations from business surveys on the most likely timing for the funds rate liftoff. It also appears in line with estimates of policy liftoff from forward interest rates derived from Treasury yields. However, in interpreting forward rates, it is important to account for the zero lower bound on interest rates.

Rebalancing the Economy: A Tale of Two Countries

2013 – 33

John C. Williams | November 12, 2013

China and the United States are both facing challenges in rebalancing their economies for the future. There are parallels and contrasts, but both face the difficult challenge of maintaining growth today while moving toward a new normal of longer-run economic health for tomorrow. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Committee of 100 in Los Angeles, California, on November 8, 2013.

Implied Rate Correlations and Policy Expectations

2013 – 32

Allan M. Malz | November 4, 2013

Certain financial instruments provide information on expectations of future interest rate movements. One relatively new instrument is yield curve options, which allow investors to take financial positions on a range of possible future interest rates. These options can shed light on the views of financial markets regarding future monetary policy at a time when short-term interest rates are near zero.

Why Are Housing Inventories Low?

2013 – 31

William Hedberg and John Krainer | October 21, 2013

Inventories of homes for sale have been slow to bounce back since the 2007–09 recession, despite steady house price appreciation since January 2012. One probable reason why many homeowners are not putting their homes on the market is that their properties may still be worth less than the value of their mortgages, which would leave them owing additional money after a sale. In other cases, homeowners may simply be hoping that house prices will continue to rise, allowing them to recover lost equity.

Gauging the Momentum of the Labor Recovery

2013 – 30

Mary C. Daly, Bart Hobijn, and Benjamin Bradshaw | October 15, 2013

Federal Reserve policymakers are watching a broad set of indicators for signs of “substantial” labor market improvement, a key consideration for beginning to scale back asset purchases. One way to find which are most useful is to focus on how well movements in these indicators predict changes in the unemployment rate. Research suggests that six indicators are most promising. They offer evidence that the recovery has more momentum now than a year ago, a strong signal that the labor market is improving and could accelerate in coming months.

Will Unconventional Policy Be the New Normal?

2013 – 29

John C. Williams | October 7, 2013

Unconventional monetary policies such as asset purchases and forward policy guidance have given the Federal Reserve much-needed tools when the traditional policy interest rate is near zero. Looking ahead to normal times, certain types of unconventional policies are best kept in reserve. If another situation arises where the Fed needs to call on these tools, it is ready and prepared to do so. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the UC San Diego Economic Roundtable in San Diego, California, on October 3, 2013.

The Zero Lower Bound and Longer-Term Yields

2013 – 28

Eric Swanson | September 30, 2013

The Federal Reserve lowered its traditional monetary policy instrument, the federal funds rate, to essentially zero in December 2008. However, economic activity generally depends on interest rates with longer maturities than the overnight fed funds rate. Research shows that interest rates with maturities of two years or more were largely unconstrained by the zero lower bound until at least late 2011. This suggests that, despite the zero bound, the Fed has been able to continue conducting monetary policy through medium- and longer-term interest rates by using forward guidance and large-scale asset purchases.

Bubbles Tomorrow, Yesterday, but Never Today?

2013 – 27

John C. Williams | September 23, 2013

Standard asset price models have generally failed to detect bubbles, with enormous costs to the economy. Economists are now creating promising new models that account for bubbles by relaxing the assumption of rational expectations and allowing people’s decisions to be driven by their perceptions of what the future may hold. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the National Association for Business Economics in San Francisco, California, on September 9, 2013.

Small Businesses Hit Hard by Weak Job Gains

2013 – 26

Elizabeth Laderman | September 9, 2013

Small businesses have historically contributed more than their share to overall employment growth in the United States. But during the recent recession, the rate of net employment losses of small businesses exceeded that of larger businesses. Sharp cuts in the rate of gross job gains at small businesses appear to have been a major factor explaining the larger net employment losses for this group. The drop in the rate of job gains reflected slower business creation and a lower rate of hiring among expanding small businesses.

The Changing Role of Disabled Children Benefits

2013 – 25

Richard V. Burkhauser and Mary C. Daly | September 3, 2013

The U.S. federal government’s program that provides cash benefits to low-income families with a disabled child has grown rapidly over the past 25 years. This growth reflects changes in the implementation of the program rather than declines in children’s health or family income. Unfortunately, most disabled children from families that receive such benefits do not become employed when they grow up, so these policy changes may relegate these children to lifetime government support—probably near the poverty threshold—at the expense of taxpayers.

What’s Behind the Increase in Part-Time Work?

2013 – 24

Rob Valletta and Leila Bengali | August 26, 2013

Part-time work spiked during the recent recession and has stayed stubbornly high, raising concerns that elevated part-time employment represents a “new normal” in the labor market. However, recent movements and current levels of part-time work are largely within historical norms, despite increases for selected demographic groups, such as prime-age workers with a high-school degree or less. In that respect, the continued high incidence of part-time work likely reflects a slow labor market recovery and does not portend permanent changes in the proportion of part-time jobs.

The Price of Stock and Bond Risk in Recoveries

2013 – 23

Simon Kwan | August 19, 2013

Investor aversion to risk varies over the course of the economic cycle. In the current recovery, the rebound in risk-taking is near the top of the historical range. The pace of economic growth does not appear to explain the increase in risk appetite. However, statistical research suggests that the severity of the preceding recession explains about 20% of the change in a measure of the long-term stock price-earnings ratio. And corporate profit growth appears to explain about 40% of the decline in the spread between risky and risk-free bonds.

How Stimulatory Are Large-Scale Asset Purchases?

2013 – 22

Vasco Cúrdia and Andrea Ferrero | August 12, 2013

The Federal Reserve’s large-scale purchases of long-term Treasury securities most likely provided a moderate boost to economic growth and inflation. Importantly, the effects appear to depend greatly on the Fed’s guidance that short-term interest rates would remain low for an extended period. Indeed, estimates from a macroeconomic model suggest that such interest rate forward guidance probably has greater effects than signals about the amount of assets purchased.

Uncertainty and the Slow Labor Market Recovery

2013 – 21

Sylvain Leduc and Zheng Liu | July 22, 2013

Since 2009, U.S. job vacancies have increased but unemployment has fallen more slowly than in past recoveries. There is evidence that heightened uncertainty about economic policy has been an important factor behind this change. Increased uncertainty may discourage businesses from filling vacancies, thereby raising unemployment. An estimate indicates that, without policy uncertainty, the unemployment rate in late 2012 would have been close to 6.5%, 1.3 percentage points lower than the actual rate.

The Path of Wage Growth and Unemployment

2013 – 20

Mary C. Daly, Bart Hobijn, and Timothy Ni | July 15, 2013

After the Great Recession, the fraction of U.S. workers whose wages were frozen reached a record high. Many employers would have preferred to cut wages, but couldn’t do so because of the reluctance of workers to accept reduced compensation. These pent-up wage cuts initially propped up wage growth, reduced hiring, and pushed up unemployment. But, over the past 2½ years, inflation has eroded the real value of frozen wages, slowing wage growth and reducing the unemployment rate. This is similar to, but more pronounced than, the pattern observed in past recessions.

What Caused the Decline in Long-term Yields?

2013 – 19

Michael D. Bauer and Glenn D. Rudebusch | July 8, 2013

Long-term U.S. government bond yields have trended down for more than two decades, but identifying the source of this decline is difficult. A new methodology suggests that reductions in long-run expectations of inflation and inflation-adjusted interest rates have played a significant role in the secular decline in yields. In contrast, standard statistical finance methods appear to overemphasize the effects of lower risk premiums and reduced uncertainty about future inflation.

The Economic Recovery: Past, Present, and Future

2013 – 18

John C. Williams | July 1, 2013

The U.S. economy is well into a period of sustained expansion, raising questions about when the Federal Reserve will cut back or end its stimulatory asset purchase program. Such moves will be appropriate at some point, but it’s still too early to act. The timing of any program adjustments will depend on incoming economic data. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Sonoma County Economic Development Board in Rohnert Park, California, on June 28, 2013.

The Future of Social Security Disability Insurance

2013 – 17

Mary C. Daly, Brian Lucking, and Jonathan A. Schwabish | June 24, 2013

Social Security Disability Insurance is projected to be insolvent before the end of the decade. How best to restore the program to long-term financial health depends on what has been driving its rapid growth. Demographic shifts and other predictable factors explain part of the increase. But a sizable share reflects increasing participation in the program across population groups. Curbing this growth is important for putting the program back on a sustainable fiscal path.

Fiscal Headwinds: Is the Other Shoe About to Drop?

2013 – 16

Brian Lucking and Daniel Wilson | June 3, 2013

Federal fiscal policy during the recession was abnormally expansionary by historical standards. However, over the past 2½ years it has become unusually contractionary as a result of several deficit reduction measures passed by Congress. During the next three years, we estimate that federal budgetary policy could restrain economic growth by as much as 1 percentage point annually beyond the normal fiscal drag that occurs during recoveries.

Economic Outlook: Moving in the Right Direction

2013 – 15

John C. Williams | May 20, 2013

The economy and the labor market have improved substantially since the Federal Reserve started its current $85 billion monthly asset purchase program last September. However, it will take further gains to demonstrate that the “substantial improvement” test for ending Fed asset purchases has been met. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the Portland Business Journal’s CFO of the Year Awards Luncheon in Portland, Oregon, on May 16, 2013.

Will Labor Force Participation Bounce Back?

2013 – 14

Leila Bengali, Mary Daly, and Rob Valletta | May 13, 2013

The most recent U.S. recession and recovery have been accompanied by a sharp decline in the labor force participation rate. The largest declines have occurred in states with the largest job losses. This suggests that some of the recent drop in the national labor force participation rate could be cyclical. Past recoveries show evidence of a similar cyclical relationship between changes in employment and participation, which could portend a moderation or reversal of the participation decline as the current recovery continues.

Crises Before and After the Creation of the Fed

2013 – 13

Early Elias and Òscar Jordà | May 6, 2013

The Federal Reserve was created 100 years ago in response to the harsh recession associated with the Panic of 1907. Comparing that recession with the Great Recession of 2007–09 suggests the Fed can mitigate downturns to some extent. A statistical analysis suggests that if a central bank had lowered interest rates during 1907 panic the same way the Fed did during the 2008 financial crisis, gross domestic product would have contracted two percentage points less than it actually did.

Commercial Real Estate and Low Interest Rates

2013 – 12

John Krainer | April 22, 2013

Commercial real estate construction faltered during the 2007 recession and has improved only slowly during the recovery. However, low interest rates have led to higher property valuations and are clearly benefiting the sector. The recovery of commercial property prices has been notable. Some measures suggest that, in some segments of the market, prices are close to their pre-recession highs. Valuation measures do not suggest that current prices are excessive.

Job Growth and Economic Growth in California

2013 – 11

David Neumark and Jennifer Muz | April 15, 2013

California job growth over the past two decades has been relatively anemic compared with gains in the rest of the country. Nevertheless, economic output has grown faster in California than in the rest of the United States. One factor underlying this pattern may be the growth of higher-wage jobs in California, which has contributed more to output than to employment growth. This creates relatively few opportunities for low-skilled workers, which may help explain why poverty increased more in California than in most states over the period.

Can Risk Aversion Explain Stock Price Volatility?

2013 – 10

Stephen F. LeRoy | April 8, 2013

Why are the prices of stocks and other assets so volatile? Efficient capital markets theory implies that stock prices should be much less volatile than actually observed, reflecting an unrealistic assumption that investors are risk neutral. If instead investors are assumed to be risk averse, predicted volatility is higher. However, models that incorporate investor avoidance of risk can explain real-world stock price volatility only under levels of risk aversion that are unrealistically high. Thus, price volatility remains unexplained.

Unconventional Monetary Policy and the Dollar

2013 – 09

Reuven Glick and Sylvain Leduc | April 1, 2013

Although the Federal Reserve does not target the dollar, its announcements about monetary policy changes can affect the dollar’s exchange value. Before the 2007-09 financial crisis, the dollar’s value generally fell when the Fed lowered its target for the federal funds rate. Since the crisis, the Fed’s announcements of monetary policy easing through unconventional means have had similar effects on the dollar’s exchange rate.

On the Reliability of Chinese Output Figures

2013 – 08

John Fernald, Israel Malkin, and Mark Spiegel | March 25, 2013

Some commentators have questioned whether China’s economy slowed more in 2012 than official gross domestic product figures indicate. However, the 2012 reported output and industrial production figures are consistent both with alternative Chinese indicators of the country’s economic activity, such as electricity production, and trade volume measures reported by non-Chinese sources. These alternative domestic and foreign sources provide no evidence that China’s economic growth was slower than official data indicate.

What’s Driving Medical-Care Spending Growth?

2013 – 07

Adam Hale Shapiro | March 11, 2013

Medical-care expenditures have been rising rapidly and now represent almost one-fifth of all U.S. economic activity. An analysis of the privately insured health-care market from 2003 to 2007 indicates that higher prices for medical services contributed largely to nominal spending growth, but did not greatly exceed general overall inflation. In addition, the quantity of services consumed per episode of treatment did not grow during this period. Instead, most of the rise in inflation-adjusted medical-care spending reflected a higher percentage of insurance enrollees receiving treatment.

U.S. Economic Mobility: The Dream and the Data

2013 – 06

Leila Bengali and Mary Daly | March 4, 2013

Economic mobility is a core principle of the American narrative and the basis for the American Dream. However, research suggests that the United States may not be as mobile as Americans believe. The United States has high absolute mobility in the sense that children readily become richer than their parents. But the nation appears to fall short on relative mobility, which is the ability of children to change their rank in the income distribution relative to their parents.

The Economy and Fed Policy: Follow the Demand

2013 – 05

John C. Williams | February 25, 2013

The primary reason unemployment remains high is a lack of demand. An aggregate demand shortfall is exactly the kind of problem monetary policy can address. Thus, we need powerful and continuing monetary stimulus to move toward maximum employment and price stability. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to The Forecasters Club in New York, New York, on February 21, 2013.

Aggregate Demand and State-Level Employment

2013 – 04

Atif Mian and Amir Sufi | February 11, 2013

What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors.

Long-term Unemployment: What Do We Know?

2013 – 03

Rob Valletta | February 4, 2013

U.S. labor market conditions have improved over the past few years. But the average duration of unemployment has remained very high, suggesting that job prospects for the long-term unemployed have stagnated. However, a closer look at the data indicates that the incidence of long-term unemployment has declined over the past few years, and that job prospects for the long-term unemployed are not as downbeat as the average duration data suggest.

Monetary Policy in Uncertain Times

2013 – 02

John C. Williams | January 21, 2013

The Federal Reserve has taken bold steps this past year, both in the approaches to stimulate the economy and the way it talks about policy. The Fed’s initiatives are working, and represent the best course to move toward maximum employment and price stability. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Semiconductor Materials and Equipment International (SEMI) 2013 Industry Strategy Symposium, in Half Moon Bay, California, on January 14, 2013.

Balance of Payments in the European Periphery

2013 – 01

Galina Hale | January 14, 2013

The countries of the European periphery are experiencing a balance of payments crisis stemming from persistent current account deficits and sharply lower private capital inflows, a condition known as a sudden stop. In countries with fixed exchange rates, sudden stops typically drain foreign reserves, forcing currency depreciation which eventually shifts the current account from deficit to surplus. However, the sudden stop has not prompted the European periphery countries to move toward devaluation by abandoning the euro, in part because capital transfers from euro-area partners have allowed them to finance current account deficits.

Monetary Policy and Interest Rate Uncertainty

2012 – 38

Michael D. Bauer | December 24, 2012

Market expectations about the Federal Reserve’s policy rate involve both the future path of that rate and the uncertainty surrounding that path. Fed policy actions have historically been preceded by high levels of uncertainty, which decline after the policy is made public. Recently, measures of near-term interest rate uncertainty have fallen to historical lows, due partly to a Fed policy rate near zero. Unconventional monetary policies have substantially lowered both expectations and uncertainty about the future path of the Fed’s policy rate.

Will the Jobless Rate Drop Take a Break?

2012 – 37

Mary Daly, Early Elias, Bart Hobijn, and Òscar Jordà | December 17, 2012

In January, the U.S. Bureau of Labor Statistics significantly reduced its projections for medium-term labor force participation. The revision implies that recent participation declines have largely been due to long-term trends rather than business-cycle effects. However, as the economy recovers, some discouraged workers may return to the labor force, boosting participation beyond the Bureau’s forecast. Given current job creation rates, if workers who want a job but are not actively looking join the labor force, the unemployment rate could stop falling in the short term.

External Shocks and China’s Monetary Policy

2012 – 36

Zheng Liu and Mark M. Spiegel | December 13, 2012

China prohibits its private sector from freely trading foreign assets and tightly manages currency exchange rates. In the wake of the recent global financial crisis, interest rates on China’s foreign assets fell sharply, while yields on Chinese domestic assets remained relatively high, posing a challenge for China’s monetary policy. Opening the capital account would improve China’s capacity to weather external shocks, such as sudden declines in foreign interest rates. However, allowing the exchange rate to float without removing capital controls is less effective.

Highway Grants: Roads to Prosperity?

2012 – 35

Sylvain Leduc and Daniel Wilson | November 26, 2012

Federal highway grants to states appear to boost economic activity in the short and medium term. The short-term effects appear to be due largely to increases in aggregate demand. Medium-term effects apparently reflect the increased productive capacity brought by improved roads. Overall, each dollar of federal highway grants received by a state raises that state’s annual economic output by at least two dollars, a relatively large multiplier.

The Federal Reserve’s Unconventional Policies

2012 – 34

John C. Williams | November 13, 2012

After the federal funds rate target was lowered to near zero in 2008, the Federal Reserve has used two types of unconventional monetary policies to stimulate the U.S. economy: forward policy guidance and large-scale asset purchases. These tools have been effective in pushing down longer-term Treasury yields and boosting other asset prices, thereby lifting spending and the economy. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the University of California, Irvine, on November 5, 2012.

Did the Housing Boom Affect Mortgage Choices?

2012 – 33

Fred Furlong and Yelena Takhtamanova | November 5, 2012

Rapid house price appreciation during the housing boom significantly influenced homebuyer selection of adjustable-rate mortgages over fixed-rate mortgages. In markets with high house price appreciation, house price gains directly influenced mortgage choice. But in markets with less appreciation, price gains did not influence borrower choices between adjustable or fixed-rate mortgages. In addition, the influence of fundamental drivers of mortgage choice, such as mortgage interest rate margins, tended to be muted in markets with high price appreciation.

Credit Access Following a Mortgage Default

2012 – 32

William Hedberg and John Krainer | October 29, 2012

Borrowers who default on mortgages return to the mortgage market at extremely slow rates. Only about 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default. Borrowers who terminate mortgages for reasons other than default return to the market about two-and-a-half times faster than those who default. Renewed access to credit takes even longer for subprime borrowers with a serious delinquency on their record.

Is China Due for a Slowdown?

2012 – 31

Israel Malkin and Mark M. Spiegel | October 15, 2012

Many analysts have predicted that a Chinese economic slowdown is inevitable because the country is approaching the per capita income at which growth in other countries began to decelerate. However, China may escape such a slowdown because of its uneven development. An analysis based on episodes of rapid expansion in four other Asian countries suggests that growth in China’s more developed provinces may slow to 5.5% by the close of the decade. But growth in the country’s less-developed provinces is expected to run at a robust 7.5% pace.

The Economic Outlook and Federal Reserve Policy

2012 – 30

John C. Williams | October 1, 2012

Progress reducing unemployment has nearly stalled, while annual inflation has fallen below the Federal Reserve’s 2% target. To move toward maximum employment and price stability, the Fed recently announced plans to purchase more mortgage-backed securities and extend its commitment to keep its benchmark interest rate exceptionally low through mid-2015. Thanks partly to these actions, the recovery should gain momentum. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at the City Club of San Francisco on September 24, 2012.

The Financial Crisis and Inflation Expectations

2012 – 29

Bharat Trehan and Oskar Zorrilla | September 24, 2012

One measure of a successful monetary policy is its ability to anchor expectations about future inflation rates. Financial crises, such as that of 2008–09, can be considered natural experiments that test this anchoring. The effects of the crisis on inflation expectations were largely temporary in the United States, but longer-lasting in the United Kingdom. That is surprising because the United Kingdom had a formal inflation target during this period. Expectations may have been affected more because inflation stayed above the central bank’s target for extended periods following the crisis.

Uncertainty, Unemployment, and Inflation

2012 – 28

Sylvain Leduc and Zheng Liu | September 17, 2012

Heightened uncertainty acts like a decline in aggregate demand because it depresses economic activity and holds down inflation. Policymakers typically try to counter uncertainty’s economic effects by easing the stance of monetary policy. But, in the recent recession and recovery, nominal interest rates have been near zero and couldn’t be lowered further. Consequently, uncertainty has reduced economic activity more than in previous recessions. Higher uncertainty is estimated to have lifted the U.S. unemployment rate by at least one percentage point since early 2008.

Assessing State Business Climate Indexes

2012 – 27

David Neumark, Jed Kolko, and Marisol Cuellar Mejia | September 4, 2012

Indexes that rank state business climates figure prominently in debates about economic policy. But empirical evidence is rarely examined on which index factors actually correlate with economic growth. A statistical analysis suggests that state business climate indexes that focus on taxes and business costs are more closely associated with growth than indexes that measure productivity and quality of life. However, these business climate elements are less important for growth than nonpolicy factors, such as climate and population density.

Small Business Loans and Small Bank Health

2012 – 26

Elizabeth Laderman | August 27, 2012

Total business loans under $1 million held by small U.S. banks continue to dwindle. Disproportionate negative growth at financially weak small banks has been an important factor in this decline. Loan volumes at strong small banks actually grew in 2011. The finding supports the view that supply conditions, not just tepid demand for credit, have affected bank lending to small businesses.

Consumer Debt and the Economic Recovery

2012 – 25

John Krainer | August 20, 2012

A key ingredient of an economic recovery is a pickup in household spending supported by increased consumer debt. As the current economic recovery has struggled to take hold, household debt levels have grown little. Some evidence indicates that households adjusted debt in line with house price movements in their local markets. However, the data show that consumer debt cutbacks were largest among households that defaulted on mortgages or had lower credit scores, suggesting that household borrowing also was restricted by tight aggregate credit supply.

Asia’s Role in the Post-Crisis Global Economy

2012 – 24

Reuven Glick and Mark M. Spiegel | August 13, 2012

In the wake of the global financial crisis of 2007–08, Asia has emerged as a pillar of financial stability and economic growth. A recent San Francisco Federal Reserve Bank conference focused on Asia’s changing role in the global economy. Asia’s relative strength is allowing it to play an expanded part in multilateral responses to the European sovereign debt crisis. And the reforms put in place following the 1997 Asian financial crisis offer models for countries currently trying to stabilize their economies.

Pricey Oil, Cheap Natural Gas, and Energy Costs

2012 – 23

Galina Hale and Fernanda Nechio | August 6, 2012

Historically, oil and natural gas prices have moved hand in hand. However, in the past few years, while oil prices climbed to near record peaks, natural gas prices fell to levels not seen since the mid-1970s as a result of new hydraulic fracturing technology. U.S. consumer energy expenditures are still mainly driven by oil prices, so household energy bills got little relief as natural gas prices fell. Moreover, even though the United States has trimmed crude oil imports, they still equal a substantial share of gross domestic product.

The Outlook and Monetary Policy Challenges

2012 – 22

John C. Williams | July 23, 2012

The pace of economic growth has been frustratingly slow and the recovery has lost momentum in recent months. The economy is weighed down by the ongoing European sovereign debt crisis and fiscal tightening in our own country. In these circumstances, it is essential that the Federal Reserve provide sufficient monetary accommodation to keep our economy moving towards the central bank’s maximum employment and price stability mandates. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Idaho, Nevada, and Oregon Bankers Associations on July 9, 2012.

Monetary Policy, Money, and Inflation

2012 – 21

John C. Williams | July 9, 2012

Textbook monetary theory holds that increasing the money supply leads to higher inflation. However, the Federal Reserve has tripled the monetary base since 2008 without inflation surging. With interest rates at historically low levels and the economy still struggling, the normal money multiplier process has broken down and inflation pressures remain subdued. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Western Economic Association International on July 2, 2012.

U.S. Fiscal Policy: Headwind or Tailwind?

2012 – 20

Brian Lucking and Dan Wilson | July 2, 2012

Aggregate state, local, and federal fiscal policy was expansionary during the Great Recession and the initial stages of recovery, providing a tailwind to economic growth. Federal fiscal policy in particular was more expansionary than usual, according to a historical analysis, even when the weakness of the economy is taken into account. However, during the past year, aggregate government budgetary policy has reversed course. Over the next few years, as federal fiscal policy shifts toward austerity, it is likely to be a headwind against economic growth.

Housing Bubbles and Homeownership Returns

2012 – 19

Marius Jurgilas and Kevin J. Lansing | June 25, 2012

In the aftermath of the global financial crisis and the Great Recession, research has sought to understand the behavior of house prices. A feature of all bubbles is the emergence of seemingly plausible fundamental arguments that attempt to justify the dramatic run-up in prices. Comparing the U.S. housing boom of the mid-2000s with ongoing Norwegian housing market trends again poses the question of whether a bubble can be distinguished from a rational response to fundamentals. Survey evidence on expectations about house prices can be useful for diagnosing a bubble.

Structural and Cyclical Economic Factors

2012 – 18

Eric Swanson | June 11, 2012

The recent recession and recovery raise important questions about the relative weight of structural and cyclical factors in the economy. A recent San Francisco Federal Reserve Bank conference explored the extent to which different economic variables behaved in a standard cyclical fashion during this episode or were scarred in a more permanent, structural manner. Both cyclical and structural effects appear evident in the recession, suggesting that some features of the U.S. economy can benefit from stimulatory monetary and fiscal policy, while others are more permanently damaged and unlikely to respond to such policies.

Are U.S. Corporate Bonds Exposed to Europe?

2012 – 17

Galina Hale, Elliot Marks, and Fernanda Nechio | June 4, 2012

The European sovereign debt crisis has created tensions in the global corporate debt market. Investors increasingly hold international assets and companies issue bonds in many countries. Thus, shocks to the European corporate bond market are readily transmitted to the U.S. corporate bond market. However, the rate of transmission is less than one-to-one. Moreover, different segments of the U.S. market vary in the magnitude of their response to European shocks. In particular, higher-rated nonfinancial borrowers and lower-rated financial borrowers are less affected on average.

Fed Asset Buying and Private Borrowing Rates

2012 – 16

Michael D. Bauer | May 21, 2012

Past rounds of large-scale asset purchases by the Federal Reserve have lowered yields not only on the targeted securities, but also on various private borrowing rates. In particular, yields on corporate bonds and primary mortgage rates decreased in response to Fed asset purchase announcements. Notably, however, the link between rates on mortgage-backed securities and actual mortgage rates has weakened in the wake of the financial crisis.

Liquidity Risk and Credit in the Financial Crisis

2012 – 15

Philip E. Strahan | May 14, 2012

The 2007–08 financial crisis was the biggest shock to the banking system since the 1930s, raising fundamental questions about liquidity risk. The global financial system experienced urgent demands for cash from various sources, including counterparties, short-term creditors, and, especially, existing borrowers. Credit fell, with banks hit hardest by liquidity pressures cutting back most sharply. Central bank emergency lending programs probably mitigated the decline. Ongoing efforts to regulate bank liquidity may strengthen the financial system and make credit less vulnerable to liquidity shocks.

Commodity Prices and PCE Inflation

2012 – 14

Galina Hale, Bart Hobijn, and Rachna Raina | May 7, 2012

Commodity prices have soared several times in recent years, raising concerns that overall inflation could rise substantially. However, crops, oil, and natural gas make up only about 5% of the cost of U.S. consumer goods and services. Thus, about one percentage point of the 10% cumulative inflation since 2007 reflects price rises in these important commodity categories. When the contribution of these commodities is subtracted from overall inflation, the resulting pattern is remarkably similar to that of core inflation, which excludes food and energy prices.

Worker Skills and Job Quality

2012 – 13

David Neumark and Rob Valletta | April 30, 2012

Some observers have argued that the nation’s high unemployment rate during the current recovery stems partly from widespread mismatches between the skills of jobseekers and the needs of employers. A recent San Francisco Federal Reserve Bank conference on workforce skills considered evidence that employers have had difficulties finding workers with appropriate skills in recent years. However, these mismatches do not appear to be much more severe than in the past. Overall, the conference proceedings suggested the U.S. economy can still produce good jobs for workers at a variety of skill levels.

Credit: A Starring Role in the Downturn

2012 – 12

Òscar Jordà | April 16, 2012

Credit is a perennial understudy in models of the economy. But it became the protagonist in the Great Recession, reviving a role it had not played since the Great Depression. In fact, the central part played by credit in the downturn and weak recovery of recent years is not unusual. A study of 14 advanced economies over the past 140 years shows that financial crises have frequently led to severe and prolonged recessions. Shining the spotlight on credit turns out to be crucial in understanding recent economic events and the outlook.

The Slow Recovery: It’s Not Just Housing

2012 – 11

John C. Williams | April 9, 2012

States that were hit hard by the housing bust performed worse economically during the recession of 2007-09. However, the close relationship between the fall in home prices and state economic activity has largely disappeared during the recovery. High unemployment, restrained demand, and idle production capacity are national in scope. These are just the sorts of problems monetary policy can address. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco at the University of San Diego on April 3, 2012.

Why Has Wage Growth Stayed Strong?

2012 – 10

Mary Daly, Bart Hobijn, and Brian Lucking | April 2, 2012

Despite a severe recession and modest recovery, real wage growth has stayed relatively solid. A key reason seems to be downward nominal wage rigidities, that is, the tendency of employers to avoid cutting the dollar value of wages. This phenomenon means that, in nominal terms, wages tend not to adjust downward when economic conditions are poor. With inflation relatively low in recent years, these rigidities have limited reductions in the real wages of a large fraction of U.S. workers.

Emerging Asia: Two Paths through the Storm

2012 – 09

Galina Hale and Alec Kennedy | March 26, 2012

The overall effect of the global financial crisis on emerging Asia was limited and short-lived. However, the crisis affected some countries in the region more than others. Two main crisis transmission channels, exposure to U.S. financial markets and reliance on manufacturing exports, determined how severely countries in the region were affected. Countries that were relatively less connected to global financial markets and relied less on trade fared better and recovered more quickly than countries that were more dependent on global financial and trade markets.

Job Creation Policies and the Great Recession

2012 – 08

David Neumark | March 19, 2012

The adverse labor market effects of the Great Recession have intensified interest in policy efforts to spur job creation. The two most direct job creation policies are subsidies that go to workers and hiring credits that go to employers. Evidence indicates that worker subsidies are generally more effective at creating jobs. However, the unique circumstances of recovery from the Great Recession, especially the weak demand for labor, make hiring credits more effective in the short term.

Do Fed TIPS Purchases Affect Market Liquidity?

2012 – 07

Jens Christensen and James Gillan | March 5, 2012

The second round of Federal Reserve large-scale asset purchases, from November 2010 to June 2011, included regular purchases of Treasury inflation-protected securities, or TIPS. An analysis of liquidity premiums indicates that the functioning of the TIPS market and the related inflation swap market improved both on the days the Fed purchased TIPS and over the course of the LSAP program. Thus, TIPS purchases had liquidity benefits beyond the effect they may have had in reducing Treasury yields.

U.S. and Euro-Area Monetary Policy by Regions

2012 – 06

Israel Malkin and Fernanda Nechio | February 27, 2012

Even in areas that have a common currency, economic conditions can vary greatly from one region to another. So a single uniform monetary policy may not be appropriate. For example, a simple monetary policy rule at times recommends different interest rates for different regions of the United States. Among euro-area countries, such a rule typically recommends an even greater divergence in interest rates, partly due to lower labor mobility, and less use of fiscal transfers to help smooth shocks.

Mortgage Prepayment: An Avenue Foreclosed?

2012 – 05

Elizabeth Laderman | February 13, 2012

When the housing boom of the past decade turned into a bust, falling house prices played a primary role in driving up delinquency and foreclosure rates. As housing values fell, distressed borrowers lost equity, which hindered their ability to escape delinquency by prepaying their mortgages by refinancing or selling their homes. Falling house prices may have especially impinged on subprime and adjustable-rate borrowers. These homeowners may have counted on being able eventually to refinance into loans with terms more affordable than those of their original mortgages.

Government Spending: An Economic Boost?

2012 – 04

Daniel J. Wilson | February 6, 2012

The severe global economic downturn and the large stimulus programs that governments in many countries adopted in response have generated a resurgence in research on the effects of fiscal policy. One key lesson emerging from this research is that there is no single fiscal multiplier that sums up the economic impact of fiscal policy. Rather, the impact varies widely depending on the specific fiscal policies put into effect and the overall economic environment.

Why Is Unemployment Duration So Long?

2012 – 03

Rob Valletta and Katherine Kuang | January 30, 2012

During the recent recession, unemployment duration reached levels well above those of past downturns. Duration has continued to rise during the uneven economic recovery that began in mid-2009. Elevated duration reflects such factors as changes in survey measurement, the demographic characteristics of the unemployed, and the availability of extended unemployment benefits. But the key explanation is the severe and persistent weakness in aggregate demand for labor.

The Federal Reserve and the Economic Recovery

2012 – 02

John C. Williams | January 17, 2012

During the financial crisis of 2007–09, the Federal Reserve took extraordinary steps to stem financial panic. Since then, the Fed has also taken extraordinary action to boost economic growth. The Fed continues to do its level best to achieve its congressionally mandated goals of maximum employment and stable prices. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco at The Columbian’s Economic Forecast Breakfast January 10, 2012, in Vancouver, Washington.

Bilateralism, Multilateralism, and Trade Rules

2012 – 01

Carolyn L. Evans | January 9, 2012

Since 2001, countries around the world have been working on crafting a new global pact to liberalize trade. Despite the difficulties of completing such a multilateral agreement, it remains a worthwhile goal for two reasons. First, a global pact offers cost and efficiency benefits that can’t be achieved under the kinds of agreements among smaller groups of countries that have proliferated in recent years. Second, a global agreement presents a unique opportunity to optimize the use of the world’s resources, thereby improving well-being around the world.

Fluctuating Fortunes and Hawaiian House Prices

2011 – 38

John Krainer and James A. Wilcox | December 19, 2011

Real estate prices in a local market can be driven by an identifiable group of purchasers. In Hawaii, residents of both the U.S. mainland and Japan have been significant purchasers of homes. An analysis suggests that house prices in Hawaii were driven primarily by purchasers from the U.S. mainland for most of the 1975–2008 period. But, during Japan’s “bubble economy” in the late 1980s and immediately thereafter, house prices in Hawaii were driven primarily by demand from Japan.

Asset Price Booms and Current Account Deficits

2011 – 37

Paul Bergin | December 5, 2011

Before the global financial crisis of 2007-2009, the United States and several other countries posted large current account deficits. Many of these countries also experienced asset price booms. Evidence suggests the two developments were linked. Rising asset values in the United States permitted households to borrow more easily to boost consumption, while the net sale of debt securities abroad financed current account deficits. The fall in some asset prices since the crisis can make it easier to reduce current account imbalances.

Signals from Unconventional Monetary Policy

2011 – 36

Michael Bauer and Glenn Rudebusch | November 21, 2011

Federal Reserve announcements of future purchases of longer-term bonds may affect asset prices by changing market expectations of the future supply of targeted securities. Such announcements may also affect asset prices by signaling that the stance of conventional monetary policy is likely to remain loose for longer than previously anticipated. Research suggests that these signaling effects were a major contributor to the cumulative declines in Treasury security yields following the eight Fed announcements in 2008 and 2009 about its first round of large-scale asset purchases.

Future Recession Risks: An Update

2011 – 35

Travis J. Berge, Early Elias, and Òscar Jordà | November 14, 2011

In 2010, statistical experiments based on components of the Conference Board’s Leading Economic Index showed a significant possibility of a U.S. recession over a 24-month period. Since then, the European sovereign debt crisis has aggravated international threats to the U.S. economy. Moreover, the Japanese earthquake and tsunami demonstrated that the U.S. economy is vulnerable to outside disruptions. Updated forecasts suggest that the probability of a U.S. recession has remained elevated and may have increased over the past year, in part because of foreign financial and economic crises.

What Moves the Interest Rate Term Structure?

2011 – 34

Michael Bauer | November 7, 2011

To understand the effects of news on bond markets, it is instructive to look beyond individual maturities and consider the entire term structure of interest rates. For example, unexpected changes in monthly nonfarm payroll employment numbers cause large movements at short and medium maturities, but do not affect long-term interest rates. Inflation news affects the long end of the term structure. Monetary policy actions vary in their effects on interest rates, but cause volatility at all maturities, including distant forward rates.

What’s in Your Wallet? The Future of Cash

2011 – 33

Jeremy Gerst and Daniel J. Wilson | October 24, 2011

The payment landscape has changed dramatically in recent years as new technologies have been brought to market. Yet, the demand for U.S. currency—cold, hard cash—shows no sign of fading. An empirical analysis indicates that alternative payment technologies have tended to keep cash growth in check, but other factors have more than offset this. Over the next 10 years, cash volume is projected to grow 1.7% per year.

Recent Trends in Small Business Lending

2011 – 32

Liz Laderman and James Gillan | October 17, 2011

Although bank small business loan portfolios continue to shrink, there are hints of possible stabilization. Among smaller banks, small business lending that is not backed by commercial real estate looks slightly healthier than small business lending that is secured by commercial property. Meanwhile, small commercial and industrial loans at larger banks are showing clear signs of a turnaround. Evidence from the 2001 recession as well as loan performance data suggest that small commercial and industrial loans at smaller banks may not be far behind.

Unconventional Monetary Policy: Lessons from the Past Three Years

2011 – 31

John C. Williams | October 3, 2011

Researchers have made great strides in improving our understanding of the effects of unconventional monetary policy. Although further study is needed, the evidence from the past few years demonstrates that both forward guidance and large-scale asset purchases are useful policy tools when short-term interest rates are constrained by the zero bound.

The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to the Swiss National Bank Research Conference on September 23, 2011. The full text is available at https://www.frbsf.org/news/speeches/2011/john-williams-0923.html

Recent Layoffs in a Fragile Labor Market

2011 – 30

Rob Valletta and Katherine Kuang | September 26, 2011

Rising layoff rates during the spring of 2011 highlight renewed labor market weakness. Although job cuts among state and local governments have accelerated over the past few years, most of the recent increase occurred among private-sector employers. Following modest improvement in early summer, subsequent labor market performance has been uneven, indicating that labor market conditions remain fragile.

Cap Rates and Commercial Property Prices

2011 – 29

Bart Hobijn, John Krainer and David Lang | September 19, 2011

Commercial real estate capitalization rates have been found to be good indicators of expected returns in commercial properties. Recent declines in these cap rates appear to be signaling a commercial real estate rebound, indicating improved investor expectations of price growth in the market. Movements in national cap rates are the predominant drivers of changes in cap rates in local markets. Therefore, the anticipated commercial real estate rebound is likely to be widespread across many metropolitan areas.

Credit Union Mergers: Efficiencies and Benefits

2011 – 28

James A. Wilcox and Luis G. Dopico | September 12, 2011

Mergers tend to improve credit union cost efficiency. When the acquirer is much larger than the target credit union, target members benefit in terms of lower loan rates and higher deposit rates, while acquirer members see little change. When merger partners are more equal in size, these benefits are shared more evenly. Over time, credit union mergers have shifted from, on average, only benefiting targets to also benefiting acquirers to some extent.

Variable Capital Rules in a Risky World

2011 – 27

Òscar Jordà | August 29, 2011

The recent financial crisis showed that a financial institution’s equity may be sufficient to absorb losses during normal times, but insufficient during periods of systemic distress. In recognition of this risk, the Basel III agreement last year introduced a new element of macroprudential regulation called countercyclical buffers, variable capital requirements that shift based on credit growth. These buffers raise the classic regulatory dilemma of safety versus economic growth, but may provide protection against financial calamity at an acceptable cost.

Boomer Retirement: Headwinds for U.S. Equity Markets?

2011 – 26

Zheng Liu and Mark M. Spiegel | August 22, 2011

Historical data indicate a strong relationship between the age distribution of the U.S. population and stock market performance. A key demographic trend is the aging of the baby boom generation. As they reach retirement age, they are likely to shift from buying stocks to selling their equity holdings to finance retirement. Statistical models suggest that this shift could be a factor holding down equity valuations over the next two decades.

The U.S. Content of “Made in China”

2011 – 25

Galina Hale and Bart Hobijn | August 8, 2011

Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label. Although the fraction is higher when the imported content of goods made in the United States is considered, Chinese imports still make up only a small share of total U.S. consumer spending. This suggests that Chinese inflation will have little direct effect on U.S. consumer prices.

Does Headline Inflation Converge to Core?

2011 – 24

Zheng Liu and and Justin Weidner | August 1, 2011

Recent surges in food and energy prices have pushed up headline inflation to levels well above its underlying trend. In contrast, core inflation, which excludes food and energy prices, has remained low and stable. Historical data suggest that, since the early 1990s, headline inflation has tended to converge toward core inflation. Thus, high inflation is unlikely to persist as long as inflation expectations remain anchored.

When Will Residential Construction Rebound?

2011 – 23

William Hedberg and John Krainer | July 25, 2011

Over the past several years, U.S. housing starts have dropped to around 400,000 units at an annualized rate, the lowest level in decades. A simple model of housing supply that takes into account residential mortgage foreclosures suggests that housing starts will return to their long-run average by about 2014 if house prices first stabilize and then begin appreciating, and the bloated inventory of foreclosed properties declines.

Securitization and Small Business

2011 – 22

James A. Wilcox | July 18, 2011

Small businesses have relied considerably on securitized markets for credit. The recent financial crisis led to a virtual cessation of securitization of some of the loans used by small businesses, such as commercial real estate mortgages, vehicle, and credit card loans. In addition, values of commercial and residential real estate, which small businesses often use as collateral for loans, dropped dramatically. As a consequence, small businesses may have experienced tighter credit conditions than larger businesses, which rely relatively less on those categories of loans and collateral.

Gauging the Impact of the Great Recession

2011 – 21

Kevin J. Lansing | July 11, 2011

The Great Recession of 2007-2009, coming on the heels of a spending binge fueled by a housing bubble, so far has resulted in over $7,300 in foregone consumption per person, or about $175 per person per month. The recession has had many costs, including negative impacts on labor and housing markets, and lost government tax revenues. The extensive harm of this episode raises the question of whether policymakers could have done more to avoid the crisis.

Stress Testing and Bank Capital Supervision

2011 – 20

Fred Furlong | June 27, 2011

Stress testing was a potent tool in the supervision of bank capital during the financial crisis. Stress tests can enhance supervision of bank capital by providing a more forward-looking and flexible process for assessing risks that might not be fully captured by risk-based capital standards. The level and quality of capital among large banking organizations has increased notably since the introduction of stress tests during the financial crisis.

TIPS Liquidity, Breakeven Inflation, and Inflation Expectations

2011 – 19

Jens Christensen and James Gillan | June 20, 2011

Estimating market expectations for inflation from the yield difference between nominal Treasury bonds and Treasury inflation-protected securities—a difference known as breakeven inflation—is complicated by the liquidity differential between these two types of securities. Currently, the extent to which liquidity plays a role in determining breakeven inflation remains contentious. Information from the market for inflation swaps provides a range for the possible liquidity premium in TIPS, which in turn suggests a range for estimates of inflation expectations that is well below the widely followed Survey of Professional Forecasters inflation forecast.

Monetary Policy When One Size Does Not Fit All

2011 – 18

Fernanda Nechio | June 13, 2011

The European Central Bank recently raised its target interest rate for the first time since the 2008 financial crisis. When compared with a simple interest rate rule, this rate hike appears consistent with the euro area’s nascent economic recovery and rising inflation. However, economic conditions vary greatly among the countries in the euro area and the ECB’s new target rate may not be suitable for all of them.

Economics Instruction and the Brave New World of Monetary Policy

2011 – 17

John C. Williams | June 6, 2011

Economics education faces a challenge in keeping up with the changes that have swept through monetary policy in recent decades. Many central banking innovations, such as interest on reserves and large-scale asset purchases, aren’t adequately treated in standard textbooks. The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to the AEA National Conference on Teaching Economics and Research in Economic Education in San Francisco on June 1, 2011.

Household Inflation Expectations and the Price of Oil: It’s Déjà Vu All Over Again

2011 – 16

Bharat Trehan | May 23, 2011

The University of Michigan survey of consumers shows that expected inflation has moved up noticeably over the past few months, raising concerns that we may be in for a period of rising inflation. However, the increase in expected inflation likely reflects the excess sensitivity of consumers to food and energy prices. Consistent with this hypothesis, household surveys have not forecast inflation well in recent years, a period of volatile food and energy prices.

What Is the Value of Bank Output?

2011 – 15

Titan Alon, John Fernald, Robert Inklaar, and J. Christina Wang | May 16, 2011

Financial institutions often do not charge explicit fees for the services they provide, but are instead compensated by the spread between interest rates on loans and deposits. The lack of explicit fees in lending makes it difficult to measure the output of banks and other financial institutions. Effective measurement should distinguish between income derived from lending services and income derived from portfolio decisions about risk and duration, and should be consistent among bank and nonbank financial institutions.

Maintaining Price Stability in a Global Economy

2011 – 14

John C. Williams | May 9, 2011

Inflation has risen of late, reflecting higher prices for many commodities. The inflation rate is likely to peak around the middle of 2011 and then return to an annual level of about 1¼ to 1½%. A sustained period of high inflation is very unlikely and the Fed will act quickly and decisively to ensure price stability. The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to Town Hall Los Angeles on May 4, 2011.

Operation Twist and the Effect of Large-Scale Asset Purchases

2011 – 13

Titan Alon and Eric Swanson | April 25, 2011

The Federal Reserve’s current large-scale asset purchase program, dubbed “QE2,” has a precedent in a 1961 initiative by the Kennedy Administration and the Federal Reserve known as “Operation Twist.” An analysis finds that four of six potentially market-moving Operation Twist announcements had statistically significant effects and that the program cumulatively caused a significant but moderate 0.15 percentage point reduction in longer-term Treasury yields. These results can be used to estimate QE2’s effects.

Has the Treasury Benefited from Issuing TIPS?

2011 – 12

Jens Christensen and James Gillan | April 18, 2011

While the market for Treasury inflation-protected securities (TIPS) has developed considerably over the past decade, the debate over whether their issuance benefits the U.S. Treasury remains contentious. Information from inflation swap rates in conjunction with a joint model of yields for nominal non-inflation-protected Treasury bonds and TIPS provides evidence that, even under conservative assumptions, the TIPS inflation risk premium has been large enough in recent years to offset the liquidity disadvantage of the series. This suggests that overall the Treasury has benefited from issuing TIPS.

The Fed’s Interest Rate Risk

2011 – 11

Glenn D. Rudebusch | April 11, 2011

To make financial conditions more supportive of economic growth, the Federal Reserve has purchased large amounts of longer-term securities in recent years. The Fed’s resulting securities portfolio has generated substantial income but may incur financial losses when market interest rates rise. Such interest rate risk appears modest, especially relative to the Fed’s policy objectives of full employment and price stability.

Are Large-Scale Asset Purchases Fueling the Rise in Commodity Prices?

2011 – 10

Reuven Glick and Sylvain Leduc | April 4, 2011

Prices of commodities including metals, energy, and food have been rising at double-digit rates in recent months. Some critics argue that Federal Reserve purchases of long-term assets are fueling this rise by maintaining an excessively expansionary monetary stance. However, daily data indicate that Federal Reserve announcements of large-scale asset purchases tended to lower commodity prices even as long-term interest rates and the value of the dollar declined.

Recent College Graduates and the Labor Market

2011 – 09

Bart Hobijn, Colin Gardiner, and Theodore Wiles | March 21, 2011

In the recent recession and recovery, the unemployment rates, part-time employment trends, and earnings growth of recent college graduates have closely mirrored the patterns they displayed during the cyclical recession of 2001 and the subsequent jobless recovery. Recent college graduates are typically not subject to structural frictions that can contribute to weak labor markets, such as mismatches between the skills of job seekers and the needs of employers. Similarities in the labor market experiences of recent college graduates in the two recessions and recoveries suggest that the current high unemployment rate is primarily cyclical.

Life-Cycle Shocks and Income

2011 – 08

Kenneth A. Couch, Mary C. Daly, and Colin Gardiner | March 14, 2011

Unexpected events such as job displacement, disability, and divorce can have negative effects on individual and family income. For many families, social insurance provided by the government plays an important role in buffering the impact of these shocks. However, on average, Americans depend more on private resources rather than the public sector to insure against these losses.

Long-Run Impact of the Crisis in Europe: Reforms and Austerity Measures

2011 – 07

Fernanda Nechio | March 7, 2011

The euro area faces its first sovereign debt crisis, highlighting the fiscal imbalances of member countries. Troubled countries are implementing austerity measures, with adjustments focusing on the short and medium run. However, a long-run solution to Europe’s problems requires economic reforms that increase competitiveness and reduce labor costs in the peripheral countries. Such reforms would promote convergence of the euro-area economies and enhance the long-run sustainability of monetary union.

Could We Have Learned from the Asian Financial Crisis of 1997-98?

2011 – 06

Galina Hale | February 28, 2011

Economists drew a number of lessons from the Asian financial crisis of 1997-98 for preventing such episodes or mitigating their effects. Some of those are similar to lessons drawn from the global financial crisis of 2007-09. But differences in economic development and sophistication of the financial systems of East Asian countries compared with those of the United States and Western Europe made it difficult to apply the lessons of the earlier crisis.

What Is the New Normal Unemployment Rate?

2011 – 05

Justin Weidner and John C. Williams | February 14, 2011

Recent labor markets developments, including mismatches in the skills of workers and jobs, extended unemployment benefits, and very high rates of long-term joblessness, may be impeding the return to “normal” unemployment rates of around 5%. An examination of alternative measures of labor market conditions suggests that the “normal” unemployment rate may have risen as much as 1.7 percentage points to about 6.7%, although much of this increase is likely to prove temporary. Even with such an increase, sizable labor market slack is expected to persist for years.

Do Initial Claims Overstate Layoffs?

2011 – 04

Bart Hobijn and Ayşegül Şahin | February 7, 2011

Initial claims for unemployment insurance averaged a stubbornly high 468,000 in the year ending December 2010, but have recently come down quickly. Many analysts interpret this as a sign that layoffs were too high to support a strong labor market recovery during most of 2010. However, claims data may have exaggerated layoffs in 2010 because the fraction of unemployed workers applying for benefits was higher than before the recession. If the proportion of eligible workers who applied were held constant, 2010 claims would have averaged roughly 20% less than the actual reading.

Estimating the Macroeconomic Effects of the Fed’s Asset Purchases

2011 – 03

Hess Chung, Jean-Philippe Laforte, David Reifschneider, and John C. Williams | January 31, 2011

An analysis shows that the Federal Reserve’s large-scale asset purchases have been effective at reducing the economic costs of the zero lower bound on interest rates. Model simulations indicate that, by 2012, the past and projected expansion of the Fed’s securities holdings since late 2008 will lower the unemployment rate by 1½ percentage points relative to what it would have been absent the purchases. The asset purchases also have probably prevented the U.S. economy from falling into deflation.

Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery

2011 – 02

Atif Mian and Amir Sufi | January 18, 2011

The U.S. economic recovery has been weak, especially in employment growth. A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. Counties where household debt grew moderately from 2002 to 2006 have seen a moderation of employment losses and a robust recovery in durable consumption and residential investment. By contrast, counties that experienced large increases in household debt during the boom have been mired in a severe recessionary environment even after the official end of the recession.

Consumers and the Economy, Part I: Household Credit and Personal Saving

2011 – 01

Reuven Glick and Kevin J. Lansing | January 10, 2011

In the years since the bursting of the housing bubble, the personal saving rate has trended up from around 1% to around 6%, while the ratio of household debt to disposable income has dropped from 130% to 118%. Changes over time in the availability of credit to households can explain 90% of the variance of the saving rate since the mid-1960s, including the recent uptrend, according to a simple empirical model.

Risky Mortgages and Mortgage Default Premiums

2010 – 38

John Krainer and Stephen LeRoy | December 20, 2010

Mortgage lenders impose a default premium on the loans they originate to compensate for the possibility that borrowers won’t make payments. The housing boom of the 2000s was characterized by increasing riskiness of the borrowers approved for mortgages and the structures of the loans themselves. Despite these changes in risk, a pricing model can justify the spreads contained in mortgages made during this period based on what at the time seemed to be reasonable expectations for house price appreciation. Contrary to those expectations, prices fell dramatically.

Mortgage-Backed Securities: How Important Is “Skin in the Game”?

2010 – 37

Christopher M. James | December 13, 2010

Financial reform legislation passed by Congress in 2010 requires mortgage originators to retain some loss exposure on the mortgages they securitize. Recent research compares the performance of mortgage-backed securities for different types of issues in which originators retain different degrees of loss exposure. The findings suggest that retention of even modest loss exposure by originators reduces moral hazard and is associated with significantly lower loss rates on these securities.

The Breadth of Disinflation

2010 – 36

Bart Hobijn and Colin Gardiner | December 6, 2010

In recent months, inflation as measured by the personal consumption expenditures price index has been trending lower. This slowdown, known as disinflation, has raised concerns that inflation might actually drop below zero and enter a period of deflation. An examination of the distribution of inflation rates across the range of goods and services that compose the index suggests that downward pressures on inflation are relatively high by historical standards.

Confidence and the Business Cycle

2010 – 35

Sylvain Leduc | November 22, 2010

The idea that business cycle fluctuations may stem partly from changes in consumer and business confidence is controversial. One way to test the idea is to use professional economic forecasts to measure confidence at specific points in time and correlate the results with future economic activity. Such an analysis suggests that changes in expectations regarding future economic performance are important drivers of economic fluctuations. Moreover, periods of heightened optimism are followed by a tightening of monetary policy.

Is Structural Unemployment on the Rise?

2010 – 34

Rob Valletta and Katherine Kuang | November 8, 2010

An increase in U.S. aggregate labor demand reflected in rising job vacancies has not been accompanied by a similar decline in the unemployment rate. Some analysts maintain that unemployed workers lack the skills to fill available jobs, a mismatch that contributes to an elevated level of structural unemployment. However, analysis of data on employment growth and jobless rates across industries, occupations, and states suggests only a limited increase in structural unemployment, indicating that cyclical factors account for most of the rise in the unemployment rate.

The Greek Crisis: Argentina Revisited?

2010 – 33

Fernanda Nechio | November 1, 2010

Greece’s enormous fiscal deficit and high debt level culminated earlier this year in the euro zone’s first sovereign debt crisis. High yields on Greece’s debt indicate that markets have priced in the possibility of default. Compared with Argentina, which defaulted on its debt in 2001, Greece’s fiscal position is much worse. However, unlike Argentina, Greece is supported by other euro zone countries and is not vulnerable to speculative currency attacks, advantages that offer it some protection from default.

TIPS and the Risk of Deflation

2010 – 32

Jens Christensen | October 25, 2010

The low level of inflation and the sluggish pace of economic recovery have raised concerns about sustained deflation—an inflation rate below zero with a general fall in prices. However, the relative prices of inflation-indexed and non-indexed Treasury bonds, which historically have proven to be good measures of inflation expectations, suggest that financial market participants consider the probability of deflation to be low.

Underwater Mortgages

2010 – 31

John Krainer and Stephen LeRoy | October 18, 2010

House prices have fallen approximately 30% from their peak in 2006, accompanied by a level of defaults and foreclosures without precedent in the post-World War II era. Many homeowners have mortgages with principal amounts higher than the market value of their properties. In general, though, the rational default point is below the “underwater” point where house price equals the remaining loan balance, and depends on prospects for future house price appreciation and borrower default costs.

Convex Payoffs: Implications for Risk-Taking and Financial Reform

2010 – 30

Stephen LeRoy | October 4, 2010

Financial executive pay is a convex function of profits if recipients get a greater increment in pay when returns are high as opposed to moderate, compared with when returns are moderate as opposed to low. Convex compensation packages give financial executives incentive to adopt risky investment projects, implement highly levered capital structures, and create new risk. Financial regulators may be able to enforce changes in compensation that would attenuate these adverse effects.

Forecasting Growth over the Next Year with a Business Cycle Index

2010 – 29

David Lang and Kevin J. Lansing | September 27, 2010

The current economic recovery is proceeding at a tepid pace despite massive federal fiscal stimulus and extremely low interest rates. Forecasts derived from business cycle indicators produced by the Chicago and Philadelphia Federal Reserve Banks predict that real U.S. GDP growth through the first half of 2011 will remain at or below potential. If these forecasts prove accurate, then the historical relationship between real GDP growth and the labor market suggests that the unemployment rate could rise by as much as 0.5 percentage point during this period.

Is the Recent Productivity Boom Over?

2010 – 28

Daniel Wilson | September 20, 2010

Productivity growth has been quite strong over the past 2½ years, despite a drop in the second quarter of 2010. Many analysts believe that productivity growth must slow sharply in order for the labor market to recover robustly. However, looking at the observable factors underlying recent productivity growth and the patterns of productivity over past recessions and recoveries, a sharp slowdown appears unlikely.

Labor Force Participation and the Future Path of Unemployment

2010 – 27

Joyce Kwok, Mary Daly, and Bart Hobijn | September 13, 2010

Although the labor market has slowly begun to recover, unemployment remains stubbornly high. The pace at which unemployment comes down over the next two years depends in part on the cyclical recovery of labor force participation and the extent to which that offsets or adds to ongoing structural changes in labor force behavior related to increased school enrollment, access to disability benefits, and movement of baby boomers into retirement.

The Effect of Immigrants on U.S. Employment and Productivity

2010 – 26

Giovanni Peri | August 30, 2010

The effects of immigration on the total output and income of the U.S. economy can be studied by comparing output per worker and employment in states that have had large immigrant inflows with data from states that have few new foreign-born workers. Statistical analysis of state-level data shows that immigrants expand the economy’s productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers.

Financial Market Imperfections and Macroeconomics: Conference Summary

2010 – 25

Eric Swanson | August 23, 2010

The Federal Reserve Bank of San Francisco’s annual macroeconomics conference focused this year on the theme “Financial Market Imperfections and Macroeconomics.” Conference papers explored the empirical and theoretical performance of the U.S. and international economies before, during, and after a financial crisis. Financial crises are typically associated with severe economic downturns, but monetary policy can help to offset some of these effects. The unconventional monetary policies pursued by many central banks after the most recent crisis may have helped prevent it from becoming much worse.

Future Recession Risks

2010 – 24

Travis J. Berge and Òscar Jordà | August 9, 2010

An unstable economic environment has rekindled talk of a double-dip recession. The Conference Board’s Leading Economic Index provides data for predicting the probability of a recession but is limited by the weight assigned to its indicators and the varying efficacy of those indicators over different time horizons. Statistical experiments with LEI data can mitigate these limitations and suggest that a recessionary relapse is a significant possibility sometime in the next two years.

Stock-Market-Based Measures of Sectoral Shocks and the Unemployment Rate

2010 – 23

Puneet Chehal, Prakash Loungani, and Bharat Trehan | August 2, 2010

Downturns in the construction and finance sectors played a significant role in the recent recession. A stock-market-based measure that captures sectoral shocks shows that these disturbances are important for explaining long-duration unemployment. This is consistent with the intuition that sectoral shocks cause workers to engage in time-consuming moves across industries in their searches for work. It also suggests that it will take a while before the more than 1.8 million unemployed construction workers and close to a half million unemployed finance and insurance workers find jobs.

Mortgage Prepayments and Changing Underwriting Standards

2010 – 22

William Hedberg and John Krainer | July 19, 2010

Despite historically low mortgage interest rates, borrower prepayments have been lower than expected over the past year. For example, a model based on prepayment data from 2000 through the beginning of 2009 predicts a prepayment rate for the first quarter of 2010 roughly twice as high as the observed rate. It can be conjectured that current low prepayment rates reflect the influence of factors specific to the housing bust, including a significant tightening of lending terms for certain borrowers, weak housing demand, and high foreclosure rates.

Lifecycle Investment Decisions and Labor Income Risk

2010 – 21

Luca Benzoni and Robert Goldstein | July 12, 2010

The optimal proportion of financial wealth placed in stocks versus risk-free bonds changes over an investor’s life and is very sensitive to the long-run correlation between stock returns and labor income. If this correlation is assumed to be high, then the optimal proportion of stock is hump-shaped and approximately zero for young agents, in contrast to the claims of financial advisers and most academic models.

Fiscal Crises of the States: Causes and Consequences

2010 – 20

Jeremy Gerst and Daniel Wilson | June 28, 2010

The recession that began in late 2007 severely reduced state tax revenue and increased demand for many public services. In the near term, institutional and political factors limit the options states have for cutting spending and raising taxes. Aid to states in the federal economic program is winding down next year and the situation is likely to get worse before it gets better. Painful budgetary choices lie ahead for many states, though the drag on the national economy should be modest.

Challenges in Economic Capital Modeling

2010 – 19

Jose A. Lopez | June 21, 2010

Financial institutions are increasingly using economic capital models to help determine the amount of capital they need to absorb unexpected losses. These models typically aggregate capital based on business-level analysis. However, important challenges surround this aggregation as well as other aspects of these models. Supervisors could use these capital calculations when they assess capital adequacy, but they need to be aware of these modeling issues.

The Fed’s Exit Strategy for Monetary Policy

2010 – 18

Glenn D. Rudebusch | June 14, 2010

As the financial crisis has receded, the Federal Reserve has scaled back its extraordinary provision of liquidity. Eventually, the Fed will remove all remaining monetary stimulus by raising the federal funds rate and shrinking its balance sheet. The timing of such renormalizations depends crucially on evolving economic conditions.

The “Inflation” in Inflation Targeting

2010 – 17

Richard Dennis | June 7, 2010

Many central banks conduct monetary policy according to an inflation targeting framework, which requires that some measure of inflation be chosen as the target. One approach would be to use an index of goods and services whose prices are market determined and not subject to frequent, idiosyncratic, and transitory changes. That could be an index based on the personal consumption expenditures prices of services and durable goods, excluding nondurable goods, similar to but distinct from the U.S. core personal consumption expenditures price index.

Loss Provisions and Bank Charge-offs in the Financial Crisis: Lesson Learned

2010 – 16

Fred Furlong and Zena Knight | May 24, 2010

The enormity of the recent financial shock was not fully apparent until well into the crisis. One result was that banks did unusually low levels of pre-reserving against eventual loan losses. Much of that underreserving was related to the extraordinary decline in real estate values that led to outsized losses on mortgage loans. This experience highlights the limitations of the bank provisioning process and the need to guard against worse-than-expected economic conditions through higher capital levels.

The Shape of Things to Come

2010 – 15

Justin Weidner and John C. Williams | May 17, 2010

Economic recoveries from the past two recessions have been much more gradual than the rapid V-shaped recoveries typical of earlier downturns. Analysis of the factors that determine economic growth rates indicates that recovery from the most recent recession is likely to be faster than from the two previous recessions, but slower than earlier V-shaped recoveries.

Is the “Invisible Hand” Still Relevant?

2010 – 14

Stephen LeRoy | May 3, 2010

The single most important proposition in economic theory, first stated by Adam Smith, is that competitive markets do a good job allocating resources. Vilfredo Pareto’s later formulation was more precise than Smith’s, and also highlighted the dependence of Smith’s proposition on assumptions that may not be satisfied in the real world. The financial crisis has spurred a debate about the proper balance between markets and government and prompted some scholars to question whether the conditions assumed by Smith and Pareto are accurate for modern economies.

The U.S. and World Economic Geography Before and After the Downturn: Conference Summary

2010 – 13

Daniel Wilson | April 26, 2010

This conference examined how the recent economic crisis has changed residential and development environments in many parts of the world. For example, the crisis has reduced home ownership and created pressure to increase neighborhood density in the United States. And, at least temporarily, it slowed migration in China to export-oriented urban areas.

The conference was sponsored by the Center for the Study of Innovation and Productivity and was held at the Federal Reserve Bank of San Francisco November 18, 2009.

Extended Unemployment and UI Benefits

2010 – 12

Rob Valletta and Katherine Kuang | April 19, 2010

During the current labor market downturn, unemployment duration has reached levels well above its previous highs. Analysis of unemployment data suggests that extended unemployment insurance benefits have not been important factors in the increase in the duration of unemployment or in the elevated unemployment rate.

The Housing Drag on Core Inflation

2010 – 11

Bart Hobijn, Stefano Eusepi, and Andrea Tambalotti | April 5, 2010

Some analysts have raised the question of whether the unprecedented declines in house values, which have been the hallmark of the recent recession, might be artificially dampening core inflation readings. However, a close examination of recent inflation data shows that the weakness in housing costs is representative of a broad pattern of subdued price increases across most consumption goods and services and is not distorting the broad downward trend in core inflation measures.

The Outlook for the Economy and Inflation, and the Case for Federal Reserve Independence

2010 – 10

Janet L. Yellen | March 29, 2010

A massive structural budget deficit threatens the long-term economic health of the United States. But the fiscal imbalance won’t necessarily fuel inflation as long as the Federal Reserve retains the independence to pursue its objectives of maximum sustainable employment and price stability. The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to Town Hall Los Angeles on March 23, 2010.

What Is China’s Capital Seeking in a Global Environment?

2010 – 09

Titan Alon, Galina Hale and João Santos | March 22, 2010

China is becoming increasingly active in international markets for mergers and acquisitions. Chinese acquirers are buying stakes in foreign companies to get access to resources, markets, and technology, among other reasons. With China’s expanding wealth and vast foreign exchange resources, further growth in the volume and variety of foreign direct investment is likely.

Asia and the Global Financial Crisis: Conference Summary

2010 – 08

Reuven Glick and Mark M. Spiegel | March 15, 2010

“Asia and the Global Financial Crisis,” the first Asia Economic Policy Conference of the Federal Reserve Bank of San Francisco’s Center for Pacific Basin Studies, examined the impact of the crisis on Asian nations and the responses of policymakers. Although nations in the region were deeply affected, they generally recovered more quickly and vigorously than other industrial and emerging markets thanks to strong economic fundamentals and reforms enacted following financial crises in the 1990s.

Okun’s Law and the Unemployment Surprise of 2009

2010 – 07

Mary Daly and Bart Hobijn | March 8, 2010

In 2009, strong growth in productivity allowed firms to lay off large numbers of workers while holding output relatively steady. This behavior threw a wrench into the long-standing relationship between changes in GDP and changes in the unemployment rate, known as Okun’s law. If Okun’s law had held in 2009, the unemployment rate would have risen by about half as much as it did over the course of the year.

Can Structural Models of Default Explain the Credit Spread Puzzle?

2010 – 06

Robert Goldstein | February 22, 2010

Structural models of default are widely used to analyze corporate bond spreads, but have generally been unable to explain why risk premiums are as high as they are. This credit spread puzzle can be addressed by taking into account such factors as the variability of the level of risk premiums and the likelihood of default over the course of the economic cycle. Models that incorporate such variations over time are more successful at generating spreads consistent with historical observations.

Diagnosing Recessions

2010 – 05

Òscar Jordà | February 16, 2010

The beginnings and ends of recessions are officially dated about 12 months after the fact. A common rule of thumb declares recessions as two quarters of consecutive negative GDP growth, but this is very inaccurate. A better option is to apply medical diagnostic evaluation methods to the business conditions indexes of the Chicago and Philadelphia Federal Reserve Banks, which suggests the recent recession ended in July or August 2009.

Hong Kong and China and the Global Recession

2010 – 04

Janet L. Yellen | February 8, 2010

Hong Kong and China are recovering impressively from global recession thanks to effective stimulus programs. But authorities worry that expansionary U.S. monetary policy may fuel asset bubbles in their economies. In the long run, the recession may nudge China toward increased domestic consumption by highlighting the risks of export-driven development. This Letter is adapted from a report by the president and CEO of the Federal Reserve Bank of San Francisco on her visit to Hong Kong and China November 15-21, 2009. Each year, the president of the San Francisco Fed joins the Federal Reserve governor responsible for liaison with Asia on a fact-finding trip to the region, in keeping with the Bank’s objective of developing expertise on issues related to the Pacific Basin.

Mortgage Choice and the Pricing of Fixed-Rate and Adjustable-Rate Mortgages

2010 – 03

John Krainer | February 1, 2010

In the United States throughout 2009, the share of adjustable-rate mortgages among total mortgage originations was very low, apparently reflecting the attractive pricing of fixed-rate mortgages relative to ARMs. Government policy could have changed the relative attractiveness of the fixed-rate mortgages and ARMs, thereby shifting the market share of these two housing finance instruments.

Inflation: Mind the Gap

2010 – 02

Zheng Liu and Glenn Rudebusch | January 19, 2010

Monetary policymakers have long debated the usefulness of the Phillips curve, which relates inflation to measures of economic slack. Since the recession started in late 2007, evidence suggests that, consistent with the Phillips curve, a high level of unemployment has contributed to a decline in inflation.

Global Household Leverage, House Prices, and Consumption

2010 – 01

Reuven Glick and Kevin J. Lansing | January 11, 2010

Household leverage in the United States and many industrial countries increased dramatically in the decade prior to 2007. Countries with the largest increases in household leverage tended to experience the fastest rises in house prices over the same period. These same countries tended to experience the biggest declines in household consumption once house prices started falling.

Bank Relationships and the Depth of the Current Economic Crisis

2009 – 38

Julian Caballero, Christopher Candelaria, and Galina Hale | December 14, 2009

The financial crisis has been worldwide in scope, but the severity has differed from country to country. Those countries whose banks played a more central role in the global financial system, were important intermediaries, or had extensive direct relationships tended to be less seriously affected, as measured by the extent of the decline in their stock markets in 2008.

Capital Structure in Banking

2009 – 37

Simon Kwan | December 7, 2009

Capital structure theories seek to explain why businesses choose different mixes of debt and equity to finance their operations. Banking firms represent a special case because of certain unique features in the industry, including a federal safety net and extensive regulation. The financial crisis of the past two years provided another set of special circumstances in which banks needed to raise capital. The preference banks have shown for issuing preferred shares in the private market in favor of government financing can be viewed through the lenses of capital structure theories.

Linkages between Monetary and Regulatory Policy: Lessons from the Crisis

2009 – 36

Janet L. Yellen | November 23, 2009

The crisis of the past two years has underscored the connections between monetary policy, which seeks to foster maximum employment and price stability, and regulatory policy, which works to protect the financial system. The two domains can’t be regarded as separate. Researchers are currently examining ways in which monetary policy may play a role in managing systemic risk and regulatory policy may serve to promote macroeconomic goals. The following is adapted from a presentation made by the president and CEO of the Federal Reserve Bank of San Francisco to the Institute of Regulation & Risk, North Asia, in Hong Kong on November 17, 2009.

Talking about Tomorrow’s Monetary Policy Today

2009 – 35

Puneet Chehal and Bharat Trehan | November 9, 2009

As part of their efforts to promote economic recovery, some central banks have announced they will not raise policy rates for specified time periods. Other central banks have not been as explicit, though they have provided guidance. A comparison of the effects of the Bank of Canada’s conditional promise to hold rates steady through the second quarter of 2010 with the Federal Reserve’s less explicit guidance finds no evidence that market participants make distinctions between these statements.

Inflation Expectations and the Risk of Deflation

2009 – 34

Jens Christensen | November 2, 2009

Predicting the course of inflation is one of the most important challenges facing monetary policymakers. Useful aids to such prediction are the measures of expected future inflation obtained from prices in government bond markets. An examination of recent inflation-indexed and non-indexed U.S. Treasury bond yields suggests that financial market participants believe that the probability of prolonged deflation has become fairly small.

Recent Developments in Mortgage Finance

2009 – 33

John Krainer | October 26, 2009

As the U.S. housing market has moved from boom in the middle of the decade to bust over the past two years, the sources of mortgage funding have changed dramatically. The government-sponsored enterprises—Fannie Mae, Freddie Mac, and Ginnie Mae—now own or guarantee an overwhelming share of originations. At the same time, non-agency mortgage securitization and loans retained in lender portfolios have largely dried up.

Gauging Aggregate Credit Market Conditions

2009 – 32

Jose A. Lopez | October 19, 2009

The Federal Reserve and other central banks have responded to the current financial crisis by taking a range of aggressive policy actions aimed at reviving credit markets. In particular, the Fed has pushed the federal funds rate, its key policy instrument, to historically low levels. Research suggests that overall credit conditions since late 2007 have remained tighter than would have been expected based on historical experience and that this tightness may be partly offsetting the Fed’s policy actions.

Disagreement about the Inflation Outlook

2009 – 31

Sylvain Leduc, Glenn D. Rudebusch, and Justin Weidner | October 5, 2009

Disagreement among economic forecasters about the future path of inflation has risen substantially since the start of the recession. The nature of this disagreement varies with the forecast time horizon, with some forecasters expecting much lower short-run inflation and others anticipating much higher long-run inflation. This variation may complicate the Federal Reserve’s monetary policy communications strategy.

Predicting Crises, Part II:Did Anything Matter (to Everybody)?

2009 – 30

Andrew K. Rose and Mark M. Spiegel | September 28, 2009

The enormity of the current financial collapse raises the question whether the crisis could have been predicted. This is the second of two Economic Letters on the topic. This Letter examines research suggesting that early warning models would not have accurately predicted the relative severity of the current crisis across countries, casting doubt on the ability of such models to forecast similar crises in the future.

Predicting Crises, Part I: Do Coming Crises Cast Their Shadows Before?

2009 – 29

Bharat Trehan | September 21, 2009

The enormity of the current financial collapse, widely described as a bursting bubble, raises the question whether the crisis could have been predicted, possibly permitting action to offset its effects. In the first of two Economic Letters on the subject, we look at developments in the United States and find evidence suggesting that simple indicators based on asset market developments can provide early warnings about potentially dangerous financial imbalances.

New Highs in Unemployment Insurance Claims

2009 – 28

Aisling Cleary, Joyce Kwok, and Rob Valletta | September 8, 2009

Unemployment insurance benefits have been on an upward trend over the past two decades, partially reversing an earlier decline. The trend is associated with shifts toward a higher share of job losers among the unemployed and longer durations of unemployment, which may cause benefits to lapse for some recipients as labor market weakness persists.

Credit Market Conditions and the Use of Bank Lines of Credit

2009 – 27

Christopher M. James | August 31, 2009

Many credit line agreements contain restrictive covenants and other contingencies that may limit the ability of borrowers to draw on their lines, which is a particular concern to small firms. This Economic Letter reviews recent empirical studies that suggest that private firms’ access to credit lines is much more sensitive to changes in bank lending standards than is access by publicly traded firms.

Growth Accounting, Potential Output, and the Current Recession

2009 – 26

John Fernald and Kyle Matoba | August 17, 2009

Total factor productivity—a measure of the efficiency with which labor and capital are used—has fallen during the current recession. But, after adjustment for lower utilization of labor and capital, such productivity has risen strongly over the past two years. These growth–accounting measures suggest that efficiency gains have continued during the recession, boding well for long-term economic growth.

Have the Fed Liquidity Facilities Had an Effect on Libor?

2009 – 25

Jens Christensen | August 10, 2009

In response to turmoil in the interbank lending market, the Federal Reserve inaugurated programs to bolster liquidity beginning in December 2007. Research offers evidence that these liquidity facilities have helped lower the London interbank offered rate, a key market benchmark, significantly from what it otherwise would have been expected to be.

Did Welfare Reform Work for Everyone? A Look at Young Single Mothers

2009 – 24

Mary Daly and Joyce Kwok | August 3, 2009

Since Congress overhauled the U.S. welfare system in 1996, single mothers between 18 and 24 have reduced welfare dependency, increased workforce participation, and registered gains in household income. The group’s growing attachment to the labor force means they may be better positioned to take advantage of unemployment insurance during the current recession.

Macroeconomic Models for Monetary Policy: Conference Summary

2009 – 23

Eric Swanson | July 20, 2009

Papers presented at the conference on “Macroeconomic Models for Monetary Policy” held March 6, 2009, at the Federal Reserve Bank of San Francisco addressed such issues as how to model wage and price behavior and how to measure economic output. The answers to these and other questions examined at the conference are highly relevant for monetary policy and for the macroeconomic models in use at central banks around the world.

A View of the Economic Crisis and the Federal Reserve’s Response

2009 – 22

Janet L. Yellen | July 6, 2009

The Federal Reserve has responded to a severe recession by developing programs to bolster the financial system and restore economic growth. The Fed has the tools to unwind these programs when appropriate, maintaining price stability. The following is adapted from a speech delivered by the president and CEO of the Federal Reserve Bank of San Francisco to the Commonwealth Club in San Francisco on June 30, 2009.

Employer Health Benefits and Insurance Expansions: Hawaii’s Experience

2009 – 21

Tom Buchmueller, John Dinardo, and Rob Valletta | June 29, 2009

As policies are proposed to expand health insurance coverage in the United States, it is useful to focus on the experience of Hawaii, where employers are required to offer such insurance to their full-time employees. Our findings suggest that Hawaii’s law has substantially increased health insurance coverage in the state, although the impact has been partially offset by employers’ increased reliance on the exempt class of employees who work fewer than 20 hours per week.

Fighting Downturns with Fiscal Policy

2009 – 20

Sylvain Leduc | June 19, 2009

Should fiscal policy be used to fight recessions? Most economists would answer that, for normal economic ups and downs, business cycle stabilization should be left to monetary policy and that fiscal policy should focus on long-term goals.

How Big Is the Output Gap?

2009 – 19

Justin Weidner and John C. Williams | June 12, 2009

The output gap measures how far the economy is from its full employment or “potential” level that depends on supply-side factors of the economy: the supply of workers and their productivity. During a boom, economic activity may for a time rise above this potential level and the output gap is positive.

Jobless Recovery Redux?

2009 – 18

Mary Daly, Bart Hobijn, and Joyce Kwok | June 5, 2009

Although the pace of layoffs appears to be subsiding and the overall economy is showing hints of stabilization, most forecasters expect unemployment to continue to increase in coming months and to recede only gradually as recovery takes hold. In this Economic Letter, we evaluate this projection using data on three labor market indicators: worker flows into and out of unemployment; involuntary part-time employment; and temporary layoffs.

The Fed’s Monetary Policy Response to the Current Crisis

2009 – 17

Glenn D. Rudebusch | May 22, 2009

The global financial market turmoil that started in August 2007 has been followed by a severe economic downturn. Indeed, the U.S. economic recession is on track to be the longest and deepest of the postwar period.

U.S. Household Deleveraging and Future Consumption Growth

2009 – 16

Reuven Glick and Kevin J. Lansing | May 15, 2009

U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007.

A Minsky Meltdown: Lessons for Central Bankers

2009 – 15

Janet L. Yellen | May 1, 2009

This Economic Letter is adapted from a speech delivered by Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco, to the 18th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies on April 16, 2009, in New York City.

Are Fiscal Stimulus Funds Going to the “Right” States?

2009 – 14

Daniel Wilson | April 17, 2009

The American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law on February 17, and already its impact is being felt in state capitals around the nation. Governors and state legislators are incorporating expected stimulus funds into 2009-2010 budgets and a number of state public works projects predicated on ARRA funding already have begun.

Interprovincial Inequality in China

2009 – 13

Christopher Candelaria, Mary Daly, and Galina Hale | April 10, 2009

Over the past 30 years, China has transformed itself, posting extraordinary rates of growth and increasing the living standards of nearly all its citizens. At the same time, China has become a far less equal nation, with vast differences emerging between those living in rural versus urban areas, inland versus coastal areas, and globally oriented versus more insular areas.

The Risk of Deflation

2009 – 12

John C. Williams | March 27, 2009

The worsening global recession has heightened concerns that the United States and other economies could enter a sustained period of deflation, as did Japan in the 1990s and the United States during the Great Depression. Indeed, a popular version of the well-known Phillips curve model of inflation predicts that we are on the cusp of a deflationary spiral in which prices will fall at ever-increasing rates over the next several years.

The Outlook for Productivity Growth: Symposium Summary

2009 – 11

Mark Doms | March 20, 2009

This Economic Letter summarizes several papers presented at the symposium “The Outlook for Future Productivity Growth” hosted November 14, 2008, by the Federal Reserve Bank of San Francisco’s Center for the Study of Innovation and Productivity (CSIP). The papers are listed at the end and most are available online.

2008 Annual Pacific Basin Conference: Summary

2009 – 10

Reuven Glick | March 13, 2009

This Economic Letter summarizes the papers presented at the 2008 Annual Pacific Basin conference held September 19-20, 2008, at the Federal Reserve Bank of San Francisco under the sponsorship of the Bank’s Center for Pacific Basin Studies. Conference papers are listed at the end and are available online.

How Will a Credit Crunch Affect Small Business Finance?

2009 – 09

Gregory F. Udell | March 6, 2009

There is considerable concern about the duration and severity of the credit crunch caused by the current financial crisis. Some evidence indicates that this could become one of the worst credit crunches in recent history.

Tax Credits for Job Creation and Retention: What Can We Learn from the States?

2009 – 08

Daniel J. Wilson and Charles Notzon | February 20, 2009

During the current recession, the economy has lost about 3.6 million jobs. In January, the nation’s unemployment rate hit 7.6%, and forecasters expect further job losses and higher unemployment rates in the months ahead. In order to boost the economy and stem job losses, Congress has just approved a substantial fiscal stimulus package, and further measures may well be introduced in the future. One measure not included in the package is a temporary federal tax credit for businesses that create jobs in the United States. But such a provision was part of the original plan proposed by the Obama transition team before the president took office and is often cited as a potential addition to the federal government’s arsenal of tax incentives.

Out-of-Market Small Business Loans

2009 – 07

Liz Laderman | February 13, 2009

Small businesses play a critical role in the U.S. economy, accounting for roughly half of all private employment and more than half of output, according to the U.S. Small Business Administration. Small businesses need financing to operate and grow, and bank lending is an important source of this financing.

House Prices and Bank Loan Performance

2009 – 06

John Krainer | February 6, 2009

The current financial crisis in the United States has its roots in falling real estate values. Indeed, a number of studies have shown a strong link between house price depreciation and defaults on residential mortgages (Doms, Furlong, and Krainer 2007).

Labor Supply Responses to Changes in Wealth and Credit

2009 – 05

Mary Daly, Bart Hobijn, and Joyce Kwok | January 30, 2009

Recent declines in house prices and the stock market have led to the most substantial contraction in household wealth since the Great Depression. From the third quarter of 2007 through the third quarter of 2008, household wealth shrank by $6.7 trillion (Federal Reserve Board of Governors 2008).

Behavior of Libor in the Current Financial Crisis

2009 – 04

Simon Kwan | January 23, 2009

One of the key features of the financial turmoil of the past year has been the credit crunch. For borrowing of many kinds, terms are tougher and interest rates are higher, reflecting skyrocketing risk premiums.

The Tech Pulse Index: Recent Trends in Tech-Sector Activity

2009 – 03

Bart Hobijn | January 14, 2009

This Economic Letter introduces the new Tech Pulse Index, a measure that tracks economic activity in the U.S. information technology (IT) sector. The index first appeared under the sponsorship of the Federal Reserve Bank of New York; due to substantial revisions of the econometric model and source data used in the current version, it is not directly comparable to versions released by the New York Fed before August 2008.

U.S. Monetary Policy Objectives in the Short and Long Run

2009 – 01-02

Janet L. Yellen | January 9, 2009

This Economic Letter is adapted from a speech delivered by Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco, on January 4, 2009, to the Andrew Brimmer Policy Forum during the IBEFA/ASSA meeting held in San Francisco.

Economic Conditions in Korea and Japan: A Monetary Policymaker’s Report

2008 – 38

Janet L. Yellen | December 19, 2008

Each year, the President of the San Francisco Fed joins the Federal Reserve Board Governor responsible for liaison with Asia on a “fact-finding” trip to the region. These trips advance the Bank’s broad objectives of serving as a repository of expertise on economic, banking, and financial issues relating to the Pacific Basin and of building ties with policymakers and economic officials there.

Convergence of Long-Term Bond Yields in the Euro Area

2008 – 37

Eric T. Swanson | November 21, 2008

Following years of negotiations involving over a dozen European nations, the Maastricht treaty was signed on February 7, 1992, and established the terms and basic timeline for European Economic and Monetary Union (EMU). Despite some bumps along the way, such as the exchange rate mechanism (ERM) crisis in September 1992, the monetary union went ahead largely according to schedule.

The Mortgage Meltdown, Financial Markets, and the Economy

2008 – 35-36

Janet L. Yellen | November 7, 2008

This Economic Letter is adapted from a speech delivered by Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco, on October 30, 2008, to the UC Berkeley-UCLA Symposium “The Mortgage Meltdown, the Economy, and Public Policy,” at the University of California, Berkeley.

Monetary Policy and Asset Prices

2008 – 34

Kevin J. Lansing | October 31, 2008

Nearly seven years have passed since the last recession ended in November 2001. That recession was characterized by an unwinding of excess business investment in the aftermath of a burst U.S. stock market bubble (see Lansing 2003a).

What Is Liquidity Risk?

2008 – 33

Jose A. Lopez | October 24, 2008

All firms, particularly financial institutions, require access to borrowed funds to carry out their operations, from paying their near-term obligations to making long-term strategic investments. An inability to acquire such funding within a reasonable timeframe could place a firm at risk, as graphically shown by the recent demise of certain investment banks and other financial institutions.

Sectoral Reallocation and Unemployment

2008 – 32

Rob Valletta and Aisling Cleary | October 17, 2008

The current downturn has caused the U.S. unemployment rate to rise by nearly 2 percentage points and approach the high of 6.3% reached in the aftermath of the 2001 recession. High unemployment generally is associated with increased slack in labor markets, hence reduced pressure for wage inflation.

Oil Prices and Inflation

2008 – 31

Michele Cavallo | October 3, 2008

As oil prices have climbed over the last several years, the memory of the 1970s and early 1980s has not been far from the minds of the public or of monetary policymakers. In those earlier episodes, rising oil prices were accompanied by double-digit overall inflation in the U.S. and in several other developed economies. Indeed, central bankers say they are determined not to let this experience recur, emphasizing that they intend to maintain their credibility with the public in securing low inflation and achieving stable and well-anchored inflation expectations.

The EMU Effect on the Currency Denomination of International Bonds

2008 – 30

Galina Hale and Mark M. Spiegel | September 26, 2008

Countries have taken substantial steps to help local firms mitigate their exposure to currency risk by issuing debt denominated in their domestic currencies and by promoting local currency bond markets, as in the Asian Bond Market Initiative. Currency risk arises when a firm’s revenues are in its home currency, while its liabilities are in a foreign currency.

The U.S. Economic Situation and the Challenges for Monetary Policy

2008 – 28-29

Janet L. Yellen | September 19, 2008

This Economic Letter is adapted from speeches delivered by Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco, on September 4 and 5, 2008, to a group of community leaders in Salt Lake City, Utah, and to the Rotary Club of Los Angeles, respectively.

Summer Reading: New Research in Applied Microeconomics Conference Summary

2008 – 27

Mark Doms | September 5, 2008

This Economic Letter summarizes several papers presented at the Federal Reserve Bank of San Francisco’s Applied Microeconomics Summer Conference, held June 25-27, 2008. The papers are listed at the end and are available online.

Regional Variation in the Potential Economic Effects of Climate Change

2008 – 26

Van Butsic, Ellen Hanak, and Rob Valletta | August 22, 2008

Extensive scientific evidence suggests that the worldwide climate has been warming in recent decades and is likely to continue doing so (IPCC 2007). The possible contribution of human activity has produced considerable debate about appropriate responses by governments, businesses, and individuals to “mitigate” (limit) the extent of global warming by reducing greenhouse gas emissions, a primary source of which is fossil fuels.

Treasury Bond Yields and Long-Run Inflation Expectations

2008 – 25

Jens Christensen | August 15, 2008

The mandate of the Federal Reserve in carrying out monetary policy is to pursue price stability and maximum employment; while not formally defined for U.S. monetary policy, price stability generally is assumed to imply a “low” and predictable rate of inflation over a period of time. One way to gauge the success of monetary policy in meeting the mandate regarding price stability is to look at expectations of inflation, which, as studies have shown, influence future inflation rates.

How and Why Does Age at Kindergarten Entry Matter?

2008 – 24

Elizabeth Cascio | August 8, 2008

Those who have spent time in a kindergarten classroom know that there are remarkable differences in children’s skills. Research has shown that these skill differences are strongly tied to age, with students who enter kindergarten later in life doing better than younger entrants.

Unanchored Expectations? Interpreting the Evidence from Inflation Surveys

2008 – 23

Wayne Huang and Bharat Trehan | July 25, 2008

Recent surveys have shown that households are expecting higher inflation in the future. These readings, coming at the same time as surging commodity prices, have raised concerns that inflation expectations are no longer well-anchored and that the Fed has lost credibility.

Can Young Americans Compete in a Global Economy?

2008 – 22

Elizabeth Cascio | July 18, 2008

Young Americans entering the labor market today face substantial competition. Employers can look all over the world for workers with the skills to meet their firms’ needs.

Monetary Policy and Asset Markets: Conference Summary

2008 – 21

Richard Dennis | July 11, 2008

This Economic Letter summarizes the papers presented at a conference on “Monetary Policy and Asset Markets” held at the Federal Reserve Bank of San Francisco on February 22, 2008. The papers are listed at the end and are available online.

Research on the Effects of Fiscal Stimulus: Symposium Summary

2008 – 20

Dan Wilson | July 3, 2008

This Economic Letter summarizes the presentations at a symposium held at the Federal Reserve Bank of San Francisco on May 9, 2008, sponsored by the Bank’s Center for the Study of Innovation and Productivity (CSIP). Presentations are listed at the end, and three of the four are available online.

Consumer Sentiment and Consumer Spending

2008 – 19

James A. Wilcox | June 27, 2008

In the U.S. economy, two-thirds of production and expenditures are devoted to consumer spending, or personal consumption expenditures (PCE), which include most of retail sales, as well as households’ expenditures on such items as rent, utilities, and much of medical care. Because this is such a large sector of the economy, the forecast accuracy of PCE affects the forecast accuracy of some of the key variables that policymakers focus on, such as unemployment, incomes, inflation, and interest rates.

Speculative Bubbles and Overreaction to Technological Innovation

2008 – 18

Kevin J. Lansing | June 20, 2008

The magnitude of short-term movements in asset prices remains a challenge to explain within a framework of rational, efficient markets. Numerous empirical studies have shown that stock prices appear to exhibit “excess volatility,” that is, prices move too much to be explained by changes in the underlying fundamentals, such as dividends or cash flows.

Did Large Recalls of Chinese Consumer Goods Lower U.S. Imports from China?

2008 – 17

Christopher Candelaria and Galina Hale | June 13, 2008

In the latter half of 2007, the media were full of stories about recalls of consumer goods produced in China, with the majority related to high concentrations of lead used in the paint for toys. The volumes and the values of the affected goods were large; for example, the value of toy industry recalls totaled almost 20% of the overall monthly import of toys and related products from China.

Retirement Savings and Decision Errors: Lessons from Behavioral Economics

2008 – 16

Phil Armour and Mary Daly | June 6, 2008

Long gone are the days when most American workers could rely on their employers to manage their retirement savings. Today, most people handle their retirement portfolios themselves, gaining the right and responsibility to determine their own best strategies.

Small Business Lending and Bank Competition

2008 – 15

Liz Laderman | May 9, 2008

Small businesses are a vital part of the fabric of the U.S. economy—according to the Small Business Administration, small businesses employ roughly half of the nation’s workers. So the question of how much bank financing small businesses are able to obtain is of real importance.

The Financial Markets, Housing, and the Economy

2008 – 13-14

Janet L. Yellen | April 18, 2008

These are challenging times for economic policymakers. The financial turmoil that has been unfolding since last summer raises fundamental questions about the structure of our financial system.

Are Global Imbalances Due to Financial Underdevelopment in Emerging Economies?

2008 – 12

Diego Valderrama | April 11, 2008

Though much of the current discussion about global imbalances focuses on the swelling current account deficit in the U.S., the other side of this imbalance itself presents a puzzle. Specifically, the increase in U.S. international liabilities must be matched by an increase in assets elsewhere, and, in the current environment, a prominent “elsewhere” is among emerging Asian economies.

Falling House Prices and Rising Time on the Market

2008 – 11

John Krainer | March 21, 2008

Much of the current trouble in the housing market has been attributed to the fact that house price appreciation—strong for many years—is finally slowing; indeed, in many markets now, house prices are falling. The mere fact that falling house prices are considered newsworthy is interesting in its own right. In other asset markets, such as the stock and bond markets, prices routinely fluctuate up and down every day.

The Corporate Bond Credit Spread Puzzle

2008 – 10

Jens Christensen | March 14, 2008

As of the end of the fourth quarter of 2006 the outstanding notional amount of U.S. corporate bonds totaled $8.2 trillion, the third largest asset class after equities and mortgage-backed securities in the U.S. Investors in the corporate bond market range from private individuals to banks and other institutional investors such as mutual funds and life insurance companies.

Assessing Employment Growth in 2007

2008 – 09

Tali Regev | March 7, 2008

In 2007, Federal Reserve policymakers and others who pay close attention to the health of the nation’s labor markets were seeing conflicting signals from two important data series on employment that often move largely in tandem. As expected, following fairly robust growth rates in 2006, both series showed reduced growth rates in 2007 as economic activity was slowing.

The Economics of Private Equity Investments: Symposium Summary

2008 – 08

Jose A. Lopez | February 29, 2008

This Economic Letter summarizes proceedings of a symposium held at the Federal Reserve Bank of San Francisco on October 19, 2007, sponsored by the Bank’s Center for the Study of Innovation and Productivity (CSIP). The symposium brought together academic researchers and private equity practitioners, including representatives of private equity firms, investors in private equity, and lenders.

Economic Conditions in Singapore and Vietnam: A Monetary Policymaker’s Report

2008 – 07

Janet L. Yellen | February 22, 2008

Each year, the President of the San Francisco Fed joins the Federal Reserve Board Governor responsible for liaison with Asia on a “fact-finding” trip to the region. These trips advance the Bank’s broad objectives of serving as a repository of expertise on economic, banking, and financial issues relating to the Pacific Basin and of building ties with policymakers and economic officials there.

Recent Trends in Economic Volatility: Conference Summary

2008 – 06

Charles Notzon and Dan Wilson | February 15, 2008

This Economic Letter summarizes the papers presented at a conference on “Recent Trends in Economic Volatility” held at the Federal Reserve Bank of San Francisco on November 2 and 3, 2007. The papers are listed at the end and are available online.

Prospects for the Economy in 2008

2008 – 04-05

Janet L. Yellen | February 8, 2008

This Economic Letter is adapted from a speech by Janet L. Yellen, president and chief executive officer of the Federal Reserve Bank of San Francisco, to the Chartered Financial Analysts of Hawaii in Honolulu, Hawaii, on February 7, 2008.

2007 Annual Pacific Basin Conference: Summary

2008 – 03

Reuven Glick | February 1, 2008

This Economic Letter summarizes the papers presented at the 2007 Annual Pacific Basin conference held at the Federal Reserve Bank of San Francisco on June 8-9, 2007, under the sponsorship of the Bank’s Center for Pacific Basin Studies. The papers are listed at the end and are online.

Publishing Central Bank Interest Rate Forecasts

2008 – 02

Glenn D. Rudebusch | January 25, 2008

Over the past two decades, the Federal Reserve has made significant strides toward greater transparency in the conduct of monetary policy. Most recently, last November, Federal Open Market Committee (FOMC) participants—that is, the Federal Reserve Presidents and Governors—started to release their projections for output growth, unemployment, and inflation to the public more frequently and with greater detail than before (Rudebusch 2008).

Publishing FOMC Economic Forecasts

2008 – 01

Glenn D. Rudebusch | January 18, 2008

Given the time lag between a monetary policy action and its effect on the economy, the importance of considering economic forecasts in the conduct of policy has long been acknowledged. Still, it is only over the past decade or so that the publication of central bank economic forecasts has been widely recognized as a potentially useful tool for monetary policy communication.

Sovereign Wealth Funds: Stumbling Blocks or Stepping Stones to Financial Globalization?

2007 – 38

Joshua Aizenman and Reuven Glick | December 14, 2007

Sovereign wealth funds (SWFs) are saving funds controlled by sovereign governments that hold and manage foreign assets. Private analysts put current sovereign wealth fund assets in the range of $1.5 to 2.5 trillion.

The U.S. Economy and Monetary Policy

2007 – 36-37

Janet L. Yellen | December 7, 2007

This Economic Letter is adapted from a speech by Janet L. Yellen, president and chief executive officer of the Federal Reserve Bank of San Francisco, to the Seattle Community Development Roundtable and the Seattle Chamber of Commerce Board of Trustees in Seattle, Washington, on December 3, 2007.

Fixing the New Keynesian Phillips Curve

2007 – 35

Richard Dennis | November 30, 2007

Price rigidity is a key mechanism through which monetary policy is thought to affect the economy. When some prices are hard to change, firms may respond to a monetary impetus by changing instead their production and employment levels.

Financial Globalization and Monetary Policy

2007 – 34

Mark M. Spiegel | November 23, 2007

This Economic Letter is adapted from a speech by Mark Spiegel, Vice President and Director of the Center for Pacific Basin Studies, delivered at the Bank of Korea’s 15th annual Central Banking Seminar, “Increasing Capital Flows among Countries and Monetary Policy,” in Seoul, Republic of Korea, September 18-21, 2007.

Labor Force Participation and the Prospects for U.S. Growth

2007 – 33

Mary Daly and Tali Regev | November 2, 2007

Growth in the labor force is one of two key determinants of the nation’s maximum sustainable, or potential, rate of economic expansion. For more than five decades, a growing labor force provided a sizeable boost to the potential rate of expansion in the U.S. economy.

Asset Price Bubbles

2007 – 32

Kevin J. Lansing | October 26, 2007

Speculative bubbles have occurred throughout history in numerous countries and asset markets. The term “bubble” was coined in England in 1720 following the famous price run-up and crash of shares in the South Sea Company.

Corporate Access to External Financing

2007 – 31

Jose A. Lopez | October 19, 2007

Access to external finance, such as bank loans or trade credit, is a key determinant of a firm’s ability to develop, operate, and expand. Economic researchers have studied how various macroeconomic and microeconomic factors influence such access; for example, it has been shown to depend on the macroeconomic environment, since economic downturns tend to limit firms’ ability to borrow and banks’ willingness to lend.

Relative Comparisons and Economics: Empirical Evidence

2007 – 30

Mary Daly and Dan Wilson | October 5, 2007

For most people, the idea that individuals compare themselves to others in determining their own utility, that is, their sense of happiness or well-being, rings true. Memories from the school yard, the neighborhood, and the workplace support the notion that we care both about our own accomplishments and how they stack up against those of others.

Internal Risk Models and the Estimation of Default Probabilities

2007 – 29

Jens Christensen | September 28, 2007

A major advancement in risk management among large financial institutions has been the development of internal risk models. The models encompass institutions’ procedures and techniques for assessing portfolio risk.

Changes in Income Inequality across the U.S.

2007 – 28

Tali Regev and Daniel Wilson | September 21, 2007

Over the past four decades, overall income inequality has increased in the U.S. One particularly striking feature of the data is that the income gap has widened most between the top and the middle of the distribution, while it has remained relatively stable between the middle and the bottom.

Recent Financial Developments and the U.S. Economic Outlook

2007 – 26-27

Janet L. Yellen | September 14, 2007

This Economic Letter is adapted from a speech by Janet L. Yellen, president and chief executive officer of the Federal Reserve Bank of San Francisco, to the National Association for Business Economics in San Francisco, California, on September 10, 2007.

Changing Productivity Trends

2007 – 25

Bharat Trehan | August 31, 2007

As important as productivity growth is to the health of the economy, much remains to be understood about how and why its trend growth rate changes. This Economic Letter discusses some of the points of debate in the research on these issues.

Are Global Prices Converging or Diverging?

2007 – 24

Reuven Glick | August 10, 2007

Most people barely think twice anymore when they discover that their toothbrush was made in China, their tee-shirt was made in Honduras, and their car was made in Germany. With an increasing volume of goods and services flowing around the world, it is natural to assume that the marketplace has become “global,” which is to say, much more integrated.

Trends in Bay Area IT Employment

2007 – 23

Lily Hsueh | August 3, 2007

The San Francisco Bay Area has long been a key center of information technology (IT) innovation and production. This Economic Letter explores how IT employment trends have evolved in this area, as well as how they compare to other key IT centers and the nation.

Regional Economic Conditions and Community Bank Performance

2007 – 22

Fred Furlong and John Krainer | July 27, 2007

Community banks, by virtue of their size and emphasis on so-called relationship banking, typically have limited geographic scope in their activities. This would seem to imply that their financial performance would be tied closely to the financial condition of their customers and, thus, to the economic conditions in regional banking markets.

What We Do and Don’t Know about the Term Premium

2007 – 21

Eric Swanson | July 20, 2007

From January 2000 through this past June, the 10-year U.S. Treasury bond yield has moved over a wide range, falling from 6.8% in early 2000 to 3.1% in June 2003 and rising back to over 5% more recently. The interest rate on 30-year fixed-rate mortgages has similarly varied from a high of 8.6% in 2000 to a low of 5.2% in June 2003 and back to about 6.75% more recently.

The U.S. Economy and Monetary Policy

2007 – 19-20

Janet L. Yellen | July 13, 2007

This Economic Letter is adapted from a speech by Janet L. Yellen, president and chief executive officer of the Federal Reserve Bank of San Francisco, delivered via videoconference to the First Annual Conference of the U.C. Berkeley-National University of Singapore Risk Management Institute, on July 5, 2007.

The Costs and Value of New Medical Technologies: Symposium Summary

2007 – 18

Rob Valletta | July 6, 2007

This Economic Letter summarizes the presentations made at a symposium by the same title sponsored by the Center for the Study of Innovation and Productivity and held at the Federal Reserve Bank of San Francisco on May 25, 2007.

The Narrowing of the Male-Female Wage Gap

2007 – 17

Mark Doms and Ethan Lewis | June 29, 2007

According to several measures, the difference in wages between men and women, the so-called “male-female wage gap” (MFWG), has shrunk substantially–by about half–over the past several decades. This phenomenon has been the subject of much research, speculation, and contention.

Credit Unions, Conversions, and Capital

2007 – 16

James Wilcox | June 22, 2007

While credit unions have been able to convert their charters more easily since the late 1990s, two conversions of very large credit unions–over $1 billion in assets each–in 2006 have put the issue on the front burner for the industry. This Economic Letter outlines some costs and benefits to their member-owners of credit unions’ converting to stock thrifts and describes one way to reform the process in order to spread the benefits of conversion more broadly to credit union members.

On Forecasting Future Monetary Policy: Has Forward-Looking Language Mattered?

2007 – 15

Simon Kwan | June 15, 2007

Today the Federal Open Market Committee is a good deal more transparent about its policy actions and deliberations than it was only 15 years ago.

House Prices and Subprime Mortgage Delinquencies

2007 – 14

Mark Doms, Frederick Furlong, and John Krainer | June 8, 2007

The recent sharp increase in subprime mortgage delinquencies has captured the public spotlight and led analysts to search for the factors that are likely to have contributed to the problem. These factors commonly include the lack of income documentation, high loan-to-income ratios, the lowering of credit standards, and the resets on adjustable-rate loans, to name but a few.

Anxious Workers

2007 – 13

Rob Valletta | June 1, 2007

In recent years, the U.S. economy has expanded at a healthy pace, employment has grown substantially, and the unemployment rate has dropped to very low levels. Despite these favorable trends, some recent news stories have emphasized worker anxiety and uncertainty about their job stability and security, reinvigorating a theme that gained substantial prominence in the mid-1990s.

Monetary Policy, Transparency, and Credibility: Conference Summary

2007 – 12

Richard Dennis and John C. Williams | May 25, 2007

This Economic Letter summarizes the papers presented at a conference on “Monetary Policy, Transparency, and Credibility” held at the Federal Reserve Bank of San Francisco on March 23 and 24, 2007. The papers are listed at the end and are available online.

U.S. Supervisory Standards for Operational Risk Management

2007 – 11

Jose A. Lopez | May 4, 2007

The U.S. bank supervisory agencies recently issued for public comment revised guidance regarding the implementation of the proposed Basel II-related, risk-based capital requirements. Among the revisions is an important update to guidance regarding operational risk management.

Do Monetary Aggregates Help Forecast Inflation?

2007 – 10

Galina Hale and Òscar Jordà | April 13, 2007

The European Central Bank (ECB) and the Federal Reserve share a similar goal, price stability, and their strategies to pursue their goals are similar–with one notable difference. When considering long-term risks to price stability, the ECB places an explicit emphasis on the link between prices and measures of the money supply (also known as monetary aggregates); the Federal Reserve System, in contrast, does not specifically emphasize monetary aggregates.

Will Fast Productivity Growth Persist?

2007 – 09

John Fernald, David Thipphavong, and Bharat Trehan | April 6, 2007

Strong productivity growth is essential for improving living standards and can have an important impact on economic policy, yet economists are far from being experts at predicting when the trend of productivity growth might shift. In the 1960s, productivity growth boomed, growing at an average annual rate of 2-1/2%. It weakened in the early 1970s, and for the next two decades or so averaged an annual growth rate of only about 1-1/4%.

The U.S. Productivity Acceleration and the Current Account Deficit

2007 – 08

Diego Valderrama | March 30, 2007

On March 14, the Bureau of Economic Analysis reported that the U.S. current account deficit for 2006 increased from the previous year to over 6% of GDP. This deficit reflects the difference between U.S. income and expenditures, and the additional indebtedness that the country needs to take on to cover this difference.

Prospects for China’s Corporate Bond Market

2007 – 07

Galina Hale | March 16, 2007

While China’s economic reforms have engendered much success since they were undertaken in the late 1970s—real GDP growth has averaged roughly 10% per year over the period—the development of its financial system arguably lags behind. Very high investment (over 40% of GDP) has fueled much of the recent growth, but, as some claim, it also has generated excess capacity in the economy, a sign of inefficient allocation of capital.

Update on China: A Monetary Policymaker’s Report

2007 – 06

Janet L. Yellen | March 9, 2007

Each year, the President of the San Francisco Fed joins the Federal Reserve Board Governor responsible for liaison with Asia on a “fact-finding” trip to the region. These trips advance the Bank’s broad objectives of serving as a repository of expertise on economic, banking, and financial issues relating to the Pacific Basin and of building ties with policymakers and economic officials there.

Financial Innovations and the Real Economy: Conference Summary

2007 – 05

Mark Doms, John Fernald, and Jose A. Lopez | March 2, 2007

This Economic Letter summarizes the papers presented at the conference “Financial Innovations and the Real Economy” held at the Federal Reserve Bank of San Francisco by the Bank’s Center for the Study of Innovation and Productivity on November 16–17, 2006.

2006 Annual Pacific Basin Conference: Summary

2007 – 04

Reuven Glick | February 9, 2007

This Economic Letter summarizes the papers presented at the annual Pacific Basin Conference held at the Federal Reserve Bank of San Francisco on June 16-17, 2006, under the sponsorship of the Bank’s Center for Pacific Basin Studies. The papers are listed at the end and are available online.

Monetary Policy Inertia and Recent Fed Actions

2007 – 03

Glenn D. Rudebusch | January 26, 2007

In the latest episode of monetary tightening in the United States, the Federal Open Market Committee (FOMC), which sets U.S. monetary policy, raised the target level of its key policy interest rate, the federal funds rate, from 1% in June 2004 to 5-1/4% in June 2006. This gradual increase was accomplished via a sequence of 17 consecutive 25-basis-point increases at successive FOMC meetings.

Disentangling the Wealth Effect: Some International Evidence

2007 – 02

Eva Sierminska and Yelena Takhtamanova | January 19, 2007

Over the past several years, movements in asset prices have substantially raised household wealth. For the U.S. and many other industrialized countries, the most recent boost has come more from the appreciation of house prices than financial assets.

Concentrations in Commercial Real Estate Lending

2007 – 01

Jose A. Lopez | January 5, 2007

Commercial real estate (CRE), such as office towers, shopping centers, and apartment buildings, makes up approximately one-third of the total value of U.S. real estate. Not surprisingly, CRE-related loans account for a significant portion of total bank lending—about 22% as of 2005.

Mortgage Innovation and Consumer Choice

2006 – 38

John Krainer | December 29, 2006

As 2006 draws to a close, one economic development that stands out over the year is the slowdown in the housing sector. In particular, the slowdown raises concerns about the perceived shift households have made toward “alternative” mortgage products, which may leave them more exposed to negative effects from higher interest rates and falling house prices.

Will Moderating Growth Reduce Inflation?

2006 – 37

Kevin J. Lansing | December 22, 2006

The December 12, 2006, statement of the Federal Open Market Committee (FOMC) said, “Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures.” The link between “inflation pressures” and the “level of resource utilization” is formalized by the Phillips curve, which says that short-term movements in inflation and unemployment (a measure of labor resource utilization) tend to go in opposite directions.

The Geographic Scope of Small Business Lending: Evidence from the San Francisco Market

2006 – 36

Liz Laderman | December 15, 2006

Historically, small businesses have tended to turn to local lenders for credit. In recent years, however, technological advances in processing information and assessing credit risk have raised the potential for loosening the geographic ties between small business borrowers and lenders. This Economic Letter discusses factors affecting the geographic scope of markets for small business credit and uses data available for the San Francisco Bay Area to examine the extent to which small businesses rely on local lenders, how this reliance has changed over time, and the implications of any changes for the Federal Reserve’s bank merger policy.

The Mystery of Falling State Corporate Income Taxes

2006 – 35

Daniel Wilson | December 8, 2006

The share of corporate profits in the U.S. collected by state governments via the corporate income tax has fallen sharply in the past quarter century. Some commentators have even referred to this as the “disappearance” of the state corporate income tax (SCIT).

Economic Inequality in the United States

2006 – 33-34

Janet L. Yellen | December 1, 2006

This Economic Letter is adapted from the 2006-2007 Economics of Governance Lecture delivered by Janet L. Yellen, president and CEO of the Federal Reserve Bank of San Francisco, at the Center for the Study of Democracy, University of California, Irvine, on November 6, 2006.

Is a Recession Imminent?

2006 – 32

John Fernald and Bharat Trehan | November 24, 2006

The sharp slowdown in housing and the inverted yield curve have led to concerns that the odds of a recession have risen. For instance, Dow Jones Newswire reported on November 2 that one model based on the yield curve put the probability of a recession over the next four quarters at more than 50%.

Interest Rates, Carry Trades, and Exchange Rate Movements

2006 – 31

Michele Cavallo | November 17, 2006

The U.S. dollar has seen some remarkable swings against major currencies recently. For example, over most of 2005, it gained nearly 18% against the yen and 13% against the euro, while between March and May 2006, it depreciated sharply against these currencies, losing almost 10% of its value.

The Rise in Homeownership

2006 – 30

Mark Doms and Meryl Motika | November 3, 2006

After decades of relative stability, the rate of U.S. homeownership began to surge in the mid-1990s, rising from 64% in 1994 to a peak of 69% in 2004, near which it has hovered ever since; this translates into 12 million more homeowners over the period (Figure 1).

What Are the Risks to the United States of a Current Account Reversal?

2006 – 29

Diego Valderrama | October 27, 2006

The U.S. current account has been in deficit since the beginning of the 1980s, except for a brief period in 1991, and has grown to 6.6% of gross domestic product (GDP) in the second quarter of 2006. The growing deficit has clearly caught the attention of policymakers and analysts.

Did Quantitative Easing by the Bank of Japan “Work”?

2006 – 28

Mark M. Spiegel | October 20, 2006

On March 19, 2001, the Bank of Japan (BOJ) embarked on an unprecedented monetary policy experiment, commonly referred to as “quantitative easing,” in an attempt to stimulate the nation’s stagnant economy. Under this policy, the BOJ increased its target for “current account balances” of commercial banks at the BOJ far in excess of their required reserve levels.

Inflation Persistence in an Era of Well-Anchored Inflation Expectations

2006 – 27

John C. Williams | October 13, 2006

Inflation expectations and core inflation in the United States have been remarkably stable during the past 10 years, a dramatic break from the pattern seen in the prior two decades, as seen in Figure 1. Indeed, long-run inflation expectations, as measured by the median response of the Survey of Professional Forecasters have barely budged since 1998.

Safe and Sound Banking, 20 Years Later

2006 – 26

Simon Kwan | October 6, 2006

The U.S. banking industry has enjoyed record profitability and very low failure rates in recent years. This scenario is a welcome contrast to the 1980s, when turbulent economic conditions, the crisis in the savings and loan industry, and a highly volatile interest rate environment put the banking industry under severe stress.

Health Insurance Costs and Declining Coverage

2006 – 25

Tom Buchmueller and Rob Valletta | September 29, 2006

As discussed in a recent (Jones 2005), the share of health-care spending in GDP has been rising rapidly in the United States and other advanced industrial countries since at least 1960. For example, data from the U.S. Centers for Medicare and Medicaid Services (CMS) indicate double-digit annual increases in premiums for private health plans during the years 2001-2003, which significantly increased the overall share of business and household expenditures devoted to medical services.

Oil Prices and the U.S. Trade Deficit

2006 – 24

Michele Cavallo | September 22, 2006

With the price of oil in world energy markets having nearly quadrupled over the last four years, it is little surprise that U.S. import prices have soared. One concern about these higher import prices relates to their implications for the U.S. trade balance, which turned to a deficit in 1992 and has been deteriorating ever since.

The Exchange Rate-Consumer Price Puzzle

2006 – 23

Diego Valderrama | September 15, 2006

Since February of 2002, the dollar has lost 27% of its value relative to other major currencies. Over the same period, consumer prices (excluding food and energy goods) have increased by a much smaller amount—8.9%.

Inflation Targets and Inflation Expectations: Some Evidence from the Recent Oil Shocks

2006 – 22

Bharat Trehan with Jason Tjosvold | September 1, 2006

A great deal of recent research has pointed out the benefits of adopting inflation targets, emphasizing, in particular, their role in helping to stabilize inflation expectations. As we discuss below, these arguments suggest that inflation expectations in countries that target inflation should react differently to the recent oil price shocks than expectations in countries that do not target inflation.

New Uses for New Macro Derivatives

2006 – 21

Justin Wolfers | August 25, 2006

Economic forecasters often look to the performance of futures markets to help predict such economic developments as movements in the price of oil and other commodities. In addition, relatively new financial market instruments, like TIPS (Treasury Inflation Protected Securities) help policymakers get a handle on the public’s inflation expectations.

Would an Inflation Target Help Anchor U.S. Inflation Expectations?

2006 – 20

Eric Swanson | August 11, 2006

Since the October 2005 nomination of Ben Bernanke to become Chairman of the Federal Reserve Board, there has been increasing speculation in the financial press that the Federal Open Market Committee (FOMC) might soon adopt an explicit numerical objective for inflation. However, skeptics of inflation targeting have maintained that this would constrain the FOMC and might provide little benefit in return—after all, it has been argued, haven’t inflation expectations in the U.S. been well anchored since the early to mid-1990s?

Performance Divergence of Large and Small Credit Unions

2006 – 19

James A. Wilcox | August 4, 2006

By various measures, larger credit unions have recently had stronger financial performance than smaller credit unions, indicating that these institutions face large and pervasive economies of scale (Wilcox 2005a). This Economic Letter uses data from the 1980-2004 period to show that this performance difference is a long-running state of affairs.

Property Debt Burdens

2006 – 18

Mark Doms and Meryl Motika | July 28, 2006

With households’ property debt surging, the use of adjustable-rate mortgages increasing, and interest rates rising, some observers have raised concerns about households’ ability to service that debt. To gain a better idea of the distribution of property debt burdens and how it has changed over time, this Economic Letter presents data from the Survey of Consumer Finances (SCF), which contains information on different types of property debt, debt service, and income.

Labor Markets and the Macroeconomy: Conference Summary

2006 – 17

Richard Dennis and John Williams | July 21, 2006

This year’s conference brought academic researchers and policymakers together to discuss six research papers that focused on labor markets, and how labor market behavior can influence the broader macroeconomy.

A Monetary Policymaker’s Passage to India

2006 – 16

Janet L. Yellen | July 7, 2006

Each year, the President of the San Francisco Fed joins the Federal Reserve Board Governor responsible for liaison with Asia on a “fact-finding” trip to the region. These trips advance the Bank’s broad objectives of serving as a repository of expertise on economic, banking, and financial issues relating to the Pacific Basin and of building ties with policymakers and economic officials there.

Residential Investment over the Real Estate Cycle

2006 – 15

John Krainer | June 30, 2006

Much attention recently has been given to the possibility of a slowdown in the U.S. residential real estate market. While real residential investment has continued to grow and existing house prices have held up through the first quarter of 2006, analysts have pointed to other signs of slowing.

International Financial Integration and the Current Account Balance

2006 – 14

Michele Cavallo | June 23, 2006

For several years, the U.S. has had a large and growing deficit in its current account, the broadest measure of the country’s trade with the rest of the world. While in 1991 the current account was roughly in balance, at the end of 2005 it reached a deficit of 7% of GDP.

Monetary Policy in a Global Environment

2006 – 12-13

Janet L. Yellen | June 2, 2006

This Economic Letter is adapted from remarks by Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco, delivered at the conference, “The Euro and the Dollar in a Globalized Economy” at the University of California, Santa Cruz on May 27, 2006.

Central Bank Capital, Financial Strength, and the Bank of Japan

2006 – 11

Thomas F. Cargill | May 19, 2006

Central bank balance sheets and capital structure in the context of legal independence, transparency, and flexibility to pursue price stability have increasingly been recognized as important issues in the optimal design of central banks. However, capital structure is more complex than a set of accounting conventions designed to organize central bank operations.

Bank Diversification, Economic Diversification?

2006 – 10

Philip E. Strahan | May 12, 2006

Business cycle volatility has fallen in the United States during the past two decades. Trehan (2005) explains some of the possible mechanisms behind our now more stable economy.

Prospects for the Economy

2006 – 09

Janet L. Yellen | April 28, 2006

This Economic Letter is adapted from remarks by Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco, delivered to the Bay Area Council 2006 Outlook Conference in San Jose, California, on April 18, 2006.

Job Matching: Evidence from the Beveridge Curve

2006 – 08

Rob Valletta and Jaclyn Hodges | April 21, 2006

Conditions in labor markets are largely reflected in the number of jobs employers want to fill (job vacancies) and the number of people seeking jobs (the unemployed). Over the business cycle, for example, job vacancy rates and unemployment rates generally exhibit negative co-movement, with high vacancies and low unemployment when the economy is growing and vice versa when the economy is contracting.

Security Analysts and Regulatory Reform

2006 – 07

Robert Marquez | April 14, 2006

Just a few years ago, Wall Street was rocked by scandals about conflicts of interest involving stock analysts’ reports. In response, the U.S. Securities and Exchange Commission (SEC) undertook investigations and filed a number of complaints against some major securities firms and analysts.

What Is the Federal Reserve Banks’ Imputed Cost of Equity Capital?

2006 – 06

Michelle L. Barnes and Jose A. Lopez | April 7, 2006

The Federal Reserve System is an important participant in the nation’s payments system, which is the infrastructure used for transmitting and settling payments between individuals, firms, and government entities. For example, as reported in the Federal Reserve System’s 2004 annual report, the twelve Federal Reserve Banks processed about 16 billion checks, or about 45%, of the 37 billion checks written in 2003.

Enhancing Fed Credibility

2006 – 05

Janet L. Yellen | March 17, 2006

This Economic Letter is adapted from remarks by Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco, delivered to the Annual Washington Policy Conference sponsored by the National Association for Business Economics (NABE) in Washington, D.C., on March 13, 2006.

External Imbalances and Adjustment in the Pacific Basin: Conference Summary

2006 – 04

Reuven Glick and Mark Spiegel | March 10, 2006

This Economic Letter summarizes the papers presented at the conference on “External Imbalances and Adjustment in the Pacific Basin” held at the Federal Reserve Bank of San Francisco on September 22-23, 2005, under the sponsorship of the Bank’s Center for Pacific Basin Studies.

Postal Savings in Japan and Mortgage Markets in the U.S.

2006 – 03

Thomas F. Cargill and Hal S. Scott | March 3, 2006

Financial system redesign has become high political drama in Japan. In August, 2005, Prime Minister Koizumi’s plan to privatize Japan’s huge postal savings and life insurance system (PSS) was defeated in the Lower House of the Diet.

Productivity Growth: Causes and Consequences—Conference Summary

2006 – 02

Daniel Wilson | February 24, 2006

The study of productivity growth is among the most important pursuits of economic science. Assessments of it influence macroeconomic policy and in the long run productivity growth drives improvements in the standard of living, the mix of goods and services available, as well as the mix of jobs in an economy.

2006: A Year of Transition at the Federal Reserve

2006 – 01

Janet L. Yellen | January 27, 2006

This Economic Letter is adapted from remarks by Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco, delivered to the Los Angeles Chapter of the National Association of Business Economists in Los Angeles on January 19, 2006.

Do Oil Futures Prices Help Predict Future Oil Prices?

2005 – 38

Tao Wu and Andrew McCallum | December 30, 2005

The price of oil has risen by about 60% since mid-2004 and by more than 40% since the beginning of 2005. Though the U.S. economy has apparently absorbed this supply shock well so far, the path of future oil prices remains a concern for monetary policymakers.

The Diffusion of Personal Computers across the U.S.

2005 – 37

Mark Doms | December 23, 2005

For the last fifteen years or so, information technology (IT) has become an ever more important part of the U.S. economy. Looking back over the period, there can be little doubt that the growing use of IT contributed significantly to the economy’s performance, especially in the latter half of the 1990s, when output grew rapidly, unemployment declined to 25-year lows, productivity surged, and the inflation rate actually fell.

Bank ATMs and ATM Surcharges

2005 – 36

Gautam Gowrisankaran and John Krainer | December 16, 2005

The automated teller machine (ATM) has become a part of everyday life. According to Dove Consulting (2004), there are approximately 371,000 ATMs in the United States that process 30 million transactions per day.

Shifting Data: A Challenge for Monetary Policymakers

2005 – 35

John Fernald and Stephanie Wang | December 9, 2005

A familiar old saw about the conduct of monetary policy is that it’s like trying to drive a car while looking only in the rearview mirror. The idea is that policymakers are trying to steer a course that will keep the economy close to full employment with low, stable inflation, while their only knowledge of the road ahead is based on data about the past.

Recent Policy Issues Regarding Credit Risk Transfer

2005 – 34

Jose A. Lopez | December 2, 2005

Over the last decade, a variety of financial tools have been developed for transferring credit risk between financial institutions. Credit risk is defined as the risk that the value of a corporate loan (or debt obligation more generally) will decline due to a change in the borrower’s ability to make payments, whether that change is an actual default or a change in the probability of default.

Uncertainty and Monetary Policy

2005 – 33

Richard Dennis | November 30, 2005

In any meeting of monetary policymakers, uncertainty is likely to play an important role in their deliberations. According to Alan Greenspan (2003), “Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.”

The Bretton Woods System: Are We Experiencing a Revival? Symposium Summary

2005 – 32

Reuven Glick and Mark Spiegel | November 25, 2005

This Economic Letter summarizes the papers presented at the symposium “Revived Bretton Woods System: A New Paradigm for Asian Development?” held at the Federal Reserve Bank of San Francisco on February 4, 2005, under the joint sponsorship of the Bank’s Center for Pacific Basin Studies and the University of California at Berkeley’s Clausen Center for International Economics.

Why Hasn’t the Jump in Oil Prices Led to a Recession?

2005 – 31

John Fernald and Bharat Trehan | November 18, 2005

Oil prices have increased substantially over the last several years. When oil price increases of this magnitude occurred during the 1970s, they were associated with severe recessions. Why hasn’t that happened this time around? This Letter explores some answers to that question.

Spendthrift Nation

2005 – 30

Kevin J. Lansing | November 10, 2005

In September 2005, the personal saving rate out of disposable income was negative for the fourth consecutive month. A negative saving rate means that U.S. consumers are spending more than 100% of their monthly after-tax income.

Economies of Scale and Continuing Consolidation of Credit Unions

2005 – 29

James A. Wilcox | November 4, 2005

Whether depository institutions can achieve economies of scale, that is, lower their average costs by increasing their sizes, has been a subject of great interest and importance to economists, regulators, and depository institutions themselves. Deregulation has allowed banks, thrifts, and credit unions to increase their size—and, thereby, to reap whatever economies of scale have long been available to larger depositories—by easing restrictions on their abilities to acquire other financial institutions and to operate over broader geographic areas.

Oil Price Shocks and Inflation

2005 – 28

Bharat Trehan | October 28, 2005

Oil prices have risen sharply over the last year, leading to concerns that we could see a repeat of the 1970s, when rising oil prices were accompanied by severe recessions and surging inflation. This Economic Letter examines the historical relationship between oil price shocks and inflation in light of some recent research and goes on to discuss what the recent jump in oil prices might mean for inflation in the future.

Estimating the “Neutral” Real Interest Rate in Real Time

2005 – 27

Tao Wu | October 21, 2005

On September 20, the Federal Open Market Committee, the nation’s monetary policymaking body, raised its target level of the federal funds rate by 25 basis points, the eleventh straight increase over the last fifteen months. The statement released immediately after the meeting said, “With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

The Rise and Spread of State R&D Tax Credits

2005 – 26

Dan Wilson | October 14, 2005

Tax credits for spending on research and development (R&D) were first enacted into federal law in the U.S. in 1981. In the ensuing quarter century, many states have adopted such tax credits, often using the federal tax credit as a model.

Inflation Expectations: How the Market Speaks

2005 – 25

Simon Kwan | October 3, 2005

The Federal Reserve wants to know what people think—specifically, the Fed wants to know what people think the future path of inflation is. One reason is that people’s expectations about inflation influence their behavior in the marketplace, and that, in turn, has consequences for future inflation.

Why Has Output Become Less Volatile?

2005 – 24

Bharat Trehan | September 16, 2005

Over the past twenty years, output growth in the U.S. has become noticeably less volatile. During that time, the economy has experienced two recessions, compared with four in each of the two preceding twenty year periods.

A Look at China’s New Exchange Rate Regime

2005 – 23

Mark M. Spiegel | September 9, 2005

On July 21, 2005, after more than a decade of strictly pegging the renminbi to the U.S. dollar at an exchange rate of 8.28, the People’s Bank of China (PBOC 2005a) announced a revaluation of the currency and a reform of the exchange rate regime. The revaluation puts the renminbi at 8.11 against the dollar, which amounts to an appreciation of 2.1%. Under the reform, the PBOC will incorporate a “reference basket” of currencies when choosing its target for the renminbi.

Policymaking on the FOMC: Transparency and Continuity

2005 – 22

Janet L. Yellen | September 2, 2005

This Economic Letter is adapted from remarks by Janet L. Yellen, President and CEO of the Federal Reserve Bank of San Francisco, delivered at the Twelfth International Conference, “Incentive Mechanisms for Economic Policymakers,” at the Institute for Monetary and Economic Studies at the Bank of Japan in Tokyo on May 31, 2005.

Housing Markets and Demographics

2005 – 21

John Krainer | August 26, 2005

Fifteen years ago, like today, there were concerns that house prices might collapse. One big difference between then and now, however, is the basis for those concerns.

Credit Union Failures and Insurance Fund Losses: 1971-2004

2005 – 20

James A. Wilcox | August 19, 2005

Over the past few decades, assets in the credit union industry have grown considerably and have grown relative to banking. As with banking, the credit union industry has experienced considerable structural change that, in part, involved failures.

Does Europe’s Path to Monetary Union Provide Lessons for East Asia?

2005 – 19

Reuven Glick | August 12, 2005

In 1999, eleven European countries adopted the euro as their common currency (Greece followed in 2001). This followed a long period of gradually tying their national currencies together more tightly by limiting exchange rate fluctuations among member countries, culminating in the European Monetary Union (EMU).

Monetary Policy and Asset Price Bubbles

2005 – 18

Glenn D. Rudebusch | August 5, 2005

In theory at least, an asset price can be separated into a component determined by underlying economic fundamentals and a nonfundamental bubble component that may reflect price speculation or irrational investor euphoria or depression. The expansion of an asset price bubble may lead to a debilitating misallocation of economic resources, and its collapse may cause severe strains on the financial system and destabilize the economy.

What If Foreign Governments Diversified Their Reserves?

2005 – 17

Diego Valderrama | July 29, 2005

World financial markets paid close attention when officials from both South Korea and Japan said that their governments were considering diversifying their holdings of foreign reserves (Dougherty 2005 and Koizumi 2005). Many analysts thought these announcements were partly in response to the past depreciation of the dollar; if true, then it seemed likely that those two governments would sell some of their dollar-denominated assets, putting further downward pressure on the dollar.

Understanding the Twin Deficits: New Approaches, New Results

2005 – 16

Michele Cavallo | July 22, 2005

Since 2002, the U.S. has seen the emergence of twin deficits—that is, a growing budget deficit along with a growing current account deficit, which reflects increasing U.S. borrowing from abroad. To some analysts, this situation seems very reminiscent of the early 1980s. In the earlier episode, there were significant tax rate cuts that were not matched by spending cuts, and between 1981 and 1986, the U.S. budget deficit went from 2.5% of GDP to about 5% of GDP and the current account went from being roughly in balance to a deficit of 3.3% of GDP.

Age and Education Effects on the Unemployment Rate

2005 – 15

Rob Valletta and Jaclyn Hodges | July 15, 2005

The national unemployment rate fell slowly during the first half of 2005, reaching 5.0% in June. While this is above the lows reached in 1999-2000, it is noticeably below the rates that largely prevailed during the mid-1970s through the mid-1990s.

Stress Tests: Useful Complements to Financial Risk Models

2005 – 14

Jose A. Lopez | June 24, 2005

Risk-management practices at financial institutions have undergone a quantitative revolution over the past decade or so. Increasingly, financial firms rely on statistical models to measure and manage financial risks, ranging from market risks (such as exchange rate fluctuations) to credit risks (such as borrowers’ default probabilities) to operational risks (such as expected losses due to fraudulent transactions).

IT Investment: Will the Glory Days Ever Return?

2005 – 13

Mark Doms | June 17, 2005

Investment in information technology (IT)—that is, business spending on computers, communications equipment, and software—has featured prominently in the ups and downs of U.S. economic growth over the last decade. In the late 1990s, double-digit growth in IT investment contributed significantly to high GDP and productivity growth rates. And in 2001, the sharp contraction in IT investment helped lead the economy into recession.

Fiscal and Monetary Policy: Conference Summary

2005 – 12

Richard Dennis and John Williams | June 10, 2005

This year’s conference brought together six research papers that explore issues related to fiscal and monetary policy and their interaction. The papers ranged from a theoretical analysis of the design of fiscal policy in a monetary union to the use of long-term bond rates to estimate monetary policy reaction functions.

Are State R&D Tax Credits Constitutional? An Economic Perspective

2005 – 11

Daniel Wilson | June 3, 2005

Policymakers at both the state and local level have long used tax incentives, in some form or other, to entice firms to locate or stay in their communities. While some economists have raised serious concerns about whether such incentives lead to socially wasteful “tax competition,” a federal appeals court decision in September 2004 has raised serious doubts about whether some are even constitutional.

More Life vs. More Goods: Explaining Rising Health Expenditures

2005 – 10

Charles I. Jones | May 27, 2005

Debates about health care have been a central feature of U.S. public policy discussions for at least the last 20 years. One trigger of these debates is the statistical evidence on the rising cost of health care.

Can Monetary Policy Influence Long-term Interest Rates?

2005 – 09

Òscar Jordà | May 20, 2005

There is a well-worn story that illustrates how economists view financial markets (and, perhaps, the rest of the world). An economist and a non-economist are walking down the street. The non-economist spots a $20 bill on the sidewalk and starts to reach for it.

The Long-term Interest Rate Conundrum: Not Unraveled Yet?

2005 – 08

Tao Wu | April 29, 2005

There is a well-worn story that illustrates how economists view financial markets (and, perhaps, the rest of the world). An economist and a non-economist are walking down the street. The non-economist spots a $20 bill on the sidewalk and starts to reach for it.

A Tale of Two Monetary Policies: Korea and Japan

2005 – 07

Thomas F. Cargill | April 15, 2005

In most countries’ experience, the course of financial liberalization—much like the course of true love in Shakespeare—”never did run smooth.” The process of reforming an economy from one where the government takes the lead in allocating financial and real resources to one where market forces determine economic outcomes can involve choices and consequences that are painful and costly.

Financial Liberalization: How Well Has It Worked for Developing Countries?

2005 – 06

Joshua Aizenman | April 8, 2005

At the beginning of the 1990s, policy doctors were almost unanimous in advocating a strong dose of capital and financial market liberation for developing countries as a way to improve their prospects for economic growth. The expectation was that such liberalization would make foreign saving available to local entrepreneurs, who would invest it in building the businesses, homes, and other infrastructure of their countries’ economies.

Gains in U.S. Productivity: Stopgap Measures or Lasting Change?

2005 – 05

Mary Daly and Fred Furlong | March 11, 2005

The performance of productivity in the U.S. economy has delivered some big surprises over the last several years. One surprise was in the latter half of the 1990s, when productivity growth surged to average an annual rate of over 3%, more than twice as fast as the rate in the previous two decades.

Productivity and Inflation

2005 – 04

Janet L. Yellen | February 18, 2005

Several recent developments have raised concerns about a productivity slowdown in the U.S. that could slow economic growth and boost inflation. For example, after soaring at the astounding rate of nearly 4-1/2% in 2002, 2003, and the first half of 2004, nonfarm labor productivity growth slowed to around 1-3/4% in the third quarter of last year and to only 3/4% in the fourth quarter.

Emerging Markets and Macroeconomic Volatility: Conference Summary

2005 – 03

Reuven Glick and Diego Valderrama | February 4, 2005

The last decade has witnessed a series of major macroeconomic crises in emerging market economies. Typically these crises have been characterized by the sudden stop of capital inflows, the collapse of fixed exchange rate regimes, falls in asset prices, and sharp declines in output.

Help-Wanted Advertising and Job Vacancies

2005 – 02

Rob Valletta | January 21, 2005

The job vacancy rate, which represents employers’ unmet labor demand, is an important indicator of the short-term outlook for hiring and job creation. Because there is no continuous aggregate vacancy series in the United States, analysts and observers interested in labor demand and hiring activity have relied on the Conference Board’s “Help-Wanted Advertising Index” to measure changes in job vacancies over time.

To Float or Not to Float? Exchange Rate Regimes and Shocks

2005 – 01

Michele Cavallo | January 7, 2005

Many economists argue that a flexible exchange rate regime is preferable to a fixed exchange rate regime because it helps to insulate the domestic economy from adverse external shocks. For example, when export demand declines, a depreciation makes domestic goods more competitive abroad, stimulates an offsetting expansion in demand, and dampens the contraction in domestic economic activity.

After the Asian Financial Crisis: Can Rapid Credit Expansion Sustain Growth?

2004 – 38

Diego Valderrama | December 24, 2004

In the years following the Asian financial crisis of 1997-1998, the governments of South Korea and Thailand each have sought to generate economic recovery by expanding domestic credit. The rapid credit expansion in both countries has created concerns about the extent to which their economies can channel these funds efficiently and sustain economic growth.

Productivity Growth and the Retail Sector

2004 – 37

Mark Doms | December 17, 2004

The phenomenal performance of labor productivity that has marked the U.S. since the mid-1990s has not only fostered economic growth and real gains in wages, but it also has kept economists busy trying to understand its underlying causes. Many studies focus on the broad economy and find that information technology (IT) has played a major role.

What Determines the Credit Spread?

2004 – 36

John Krainer | December 10, 2004

Although the swings in economic measures during the last recession and recovery were fairly modest, swings in financial markets were quite large. Once financial markets found their footing, after steep losses in 2000-2002, prices on virtually all traded financial claims rose as the economic outlook improved.

October 6, 1979

2004 – 35

Carl E. Walsh | December 3, 2004

Twenty-five years ago, on October 6, 1979, the Federal Reserve adopted new policy procedures that led to skyrocketing interest rates and two back-to-back recessions but that also broke the back of inflation and ushered in the environment of low inflation and general economic stability the United States has enjoyed for nearly two decades. The dramatic policy actions by the Federal Reserve in 1979 represented an important break with the past, both in the way monetary policy was conducted and in the importance placed on controlling inflation.

Outsourcing by Financial Services Firms: The Supervisory Response

2004 – 34

Jose A. Lopez | November 26, 2004

In the financial services industry, outsourcing has been in use for quite some time. For example, since the 1970s, financial institutions have used outside firms for such clerical activities as printing customer financial statements and storing records.

Easing Out of the Bank of Japan’s Monetary Easing Policy

2004 – 33

Mark M. Spiegel | November 19, 2004

Based on the latest data and forecasts from Japan, it would be premature to declare the end of that country’s deflationary period. The Bank of Japan (BOJ) forecasts that consumer prices will continue to fall through the 2004 fiscal year, which ends in March 2005, albeit only at a 0.1% to 0.2% annual pace.

Does Locale Affect R&D Productivity? The Case of Pharmaceuticals

2004 – 32

Margaret Kyle | November 12, 2004

As the U.S. economy becomes more “knowledge-based,” the decisions that policymakers and firms make about spending on research and development (R&D) take on increasing significance. In making those decisions, an important dynamic of R&D to consider is that most innovations borrow heavily from prior or related work; this implies that enhancing the potential for such “spillovers” from one researcher’s innovative efforts to another’s could make R&D more productive.

Reflections on China’s Economy

2004 – 31

Janet L. Yellen | November 5, 2004

This Economic Letter is adapted from remarks delivered to the International Financial Institutions Association of California and the National Association of Chinese American Bankers in Santa Monica, California, on October 15, 2004.

Inflation-Induced Valuation Errors in the Stock Market

2004 – 30

Kevin J. Lansing | October 29, 2004

A recent front-page article in the Wall Street Journal documented an increasing tendency among economists to move away from theories of efficient stock market valuation in favor of “behavioral” models that emphasize the role of irrational investors (see Hilsenrath 2004). The long-run rate of return on stocks is ultimately determined by the stream of corporate earnings distributions (cash flows) that accrue to shareholders.

Consumer Sentiment and the Media

2004 – 29

Mark Doms | October 22, 2004

Policymakers and forecasters pay close attention to a lot of indicators that help them understand the economy’s current condition and the conditions that are likely to prevail in the future. One of the key indicators is not a so-called “hard” statistic, like “Real Gross Private Domestic Investment.”

Gauging the Market’s Expectations about Monetary Policy

2004 – 28

Simon Kwan | October 8, 2004

In recent months, some Federal Reserve officials have discussed the organization’s efforts at communicating to make the foundations of their decisionmaking more transparent to the public. Janet Yellen, president of the Federal Reserve Bank of San Francisco, said, “The reason for the focus on communication is that economic developments are affected by longer-term interest rates, equity values, the exchange rate, and other asset values—and these factors depend not only on the current [federal] funds rate, but, more importantly, on the expected future path of the funds rate” (Yellen 2004).

House Prices and Fundamental Value

2004 – 27

John Krainer and Chishen Wei | October 1, 2004

The performance of the residential housing market over the last ten years has been remarkable. According to the Office of Federal Housing Enterprise Oversight (OFHEO), house prices have appreciated at an annual rate of 5.4% on average (68.9% over the whole time period).

Supervising Interest Rate Risk Management

2004 – 26

Jose A. Lopez | September 17, 2004

Over the past 20 years, financial institutions have made significant efforts to establish and improve their procedures for interest rate risk management, including using economic models of interest rates and related models of credit risk (Lopez 2001a, b). At the same time, bank supervisors worldwide, including the Federal Reserve, have been expanding their knowledge and oversight of interest rate risk management techniques.

Exchange Rate Movements and the U.S. International Balance Sheet

2004 – 25

Michele Cavallo | September 10, 2004

The U.S. current account deficit has been growing for several years, as the country has been importing increasingly more than it has been exporting. In 1992, the current account deficit was 0.8% of GDP, and by the end of 2003, it had soared to an unprecedented 4.8% of GDP.

City or Country: Where Do Businesses Use the Internet?

2004 – 24

Chris Forman, Avi Goldfarb, and Shane Greenstein | September 3, 2004

In just about ten years or so, the commercial use of the internet has metamorphosed from a researcher’s tool to an everyday business necessity. Indeed, a large fraction of the boom in business investment in information technology (IT) was related to business applications and infrastructure using internet-related technology.

Two Measures of Employment: How Different Are They?

2004 – 23

Tao Wu | August 27, 2004

Since the end of the 2001 recession, the U.S. economy has performed pretty well in terms of output growth, averaging about 3-1/4 percent a year. But how well has the economy performed in terms of creating jobs?

Measuring the Costs of Exchange Rate Volatility

2004 – 22

Paul Bergin | August 20, 2004

Many countries go to great lengths to manage their exchange rates. Probably the most prominent recent example is the European Monetary Union, where all the members abandoned their national currencies and adopted the euro.

Does a Fall in the Dollar Mean Higher U.S. Consumer Prices?

2004 – 21

Diego Valderrama | August 13, 2004

Beginning in early 2002, the dollar tumbled against major currencies like the euro, the British pound, and the Japanese yen; though it has risen somewhat in recent months, it is still well below that peak. One of the key questions this has raised for U.S. monetary policymakers is: How much of the decline in the dollar passed through to import prices and to overall consumer prices?

Monetary and Financial Integration: Evidence from the EMU

2004 – 20

Mark M. Spiegel | August 6, 2004

Most economists would argue that monetary integration leads to financial integration; in other words, when a set of countries has a common currency, as in the European Monetary Union (EMU), for example, those countries also would tend to have more extensive international financial activity. Two main reasons are generally cited. First, monetary integration reduces “currency risk,” which is the risk that the value of debt obligations would change due to fluctuations in currency values.

The Computer Evolution

2004 – 19

Rob Valletta and Geoffrey MacDonald | July 23, 2004

Since the introduction of the IBM PC in 1981, desktop computers have become a standard fixture in most workplaces. Through their ubiquity and impact on how work is done, personal computers (PCs) arguably have transformed the workplace.

The Productivity and Jobs Connection: The Long and the Short Run of It

2004 – 18

Carl E. Walsh | July 16, 2004

Ask any economist and he or she will tell you that faster productivity growth leads to higher real wages and improved living standards. So, from those perspectives, the recent evidence of strong productivity growth in the U.S. is good news.

New Keynesian Models and Their Fit to the Data

2004 – 17

Richard Dennis | July 9, 2004

Central banks use macroeconomic models to help frame the issues that they face, to mold their ideas, and to guide them in their decisionmaking. While a wide range of models are available, economists are increasingly examining monetary policy issues and the design of optimal monetary policies in the context of “New Keynesian” macroeconomic models.

Has the CRA Increased Lending for Low-Income Home Purchases?

2004 – 16

Liz Laderman | June 25, 2004

When Congress enacted the Community Reinvestment Act (CRA) in 1977, its main goal was to address concerns that some banking institutions were not fully meeting the credit needs of qualified potential borrowers, particularly those in low- and moderate-income (LMI) and minority neighborhoods of inner cities. Since then, debate has continued over the need for, and the effectiveness of, the CRA.

Banking Consolidation

2004 – 15

Simon Kwan | June 18, 2004

Until this year, Citigroup was the only $1 trillion banking organization in the U.S. Now, there are two more—Bank of America has merged with FleetBoston, and J.P. Morgan Chase is about to complete its merger with Bank One. These megamergers are notable not only for their size but also for the geographic scope that the new institutions will serve.

Policy Applications of a Global Macroeconomic Model

2004 – 14

Richard Dennis and Jose A. Lopez | June 11, 2004

Central banks and other policy institutions have a long history of using macroeconomic models to help prepare forecasts and to quantify the economic consequences of various policies. Likewise, private sector firms have long depended on models to summarize these complex interactions succinctly and to evaluate the likelihood of specific macroeconomic outcomes; this is especially true for financial institutions, where such models can help with capital investment and asset allocation decisions.

Interest Rates and Monetary Policy: Conference Summary

2004 – 13

Richard Dennis and Tao Wu | June 4, 2004

This Economic Letter summarizes the papers presented at a conference on “Interest Rates and Monetary Policy” held at the Federal Reserve Bank of San Francisco on March 19 and 20, 2004, under the joint sponsorship of the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research.

Globalization: Threat or Opportunity for the U.S. Economy?

2004 – 12

Robert T. Parry | May 21, 2004

As a monetary policymaker, my main concern is the health of the U.S. economy. Although the economy turned in a pretty sluggish performance for a long while after the 2001 recession, it has shown some real strength over the last few quarters in terms of output growth and productivity.

Can International Patent Protection Help a Developing Country Grow?

2004 – 11

Diego Valderrama | May 14, 2004

International patent protection was a key issue at the multilateral trade talkssponsored by the World Trade Organization in Cancun in September 2003. Indeed,since the organization was founded almost ten years ago, the international protectionof intellectual property rights (IPR) has been a bone of contention between developingand industrialized countries.

Workplace Practices and the New Economy

2004 – 10

Sandra E. Black and Lisa M. Lynch | April 16, 2004

Since the second half of the 1990s, the growth rate of labor productivity has been faster than at any time since the 1960s, especially in the manufacturing sector. This turnaround in labor productivity had led many to wonder whether there is something “new” going on in the U.S. economy, and, if so, whether it is sustainable.

Do Differences in Countries’ Capital Composition Matter?

2004 – 09

Daniel Wilson | April 9, 2004

There are enormous differences among countries in terms of what kinds of capital equipment they use. These differences are reflected in patterns of imports for the most part, since, except for a few highly advanced, equipment-producing countries, most countries import the vast majority of their equipment.

Understanding Deflation

2004 – 08

Tao Wu | April 2, 2004

Since the double-digit inflation of the 1970s, the Federal Reserve has consistently pursued the goal of price stability in the United States. And, since the second half of 2002, the year-to-year increase in the core Consumer Price Index (that is, excluding the relatively volatile food and energy components) has been below 2%, which, according to Fed Governor Bernanke, is probably the de facto equivalent of price stability (Bernanke 2003).

Technology, Productivity, and Public Policy

2004 – 07

Mary Daly and John Williams | March 12, 2004

This Economic Letter summarizes papers presented at the conference “Technology, Productivity, and Public Policy” held at the Federal Reserve Bank of San Francisco on November 7-8, 2003. The conference was the inaugural event of the new Center for the Study of Innovation and Productivity (CSIP), which is organized within the Economic Research Department of the Bank.

Resolving Sovereign Debt Crises with Collective Action Clauses

2004 – 06

Kenneth Kletzer | February 20, 2004

Ever since Mexico’s “Tequila crisis” in 1994-1995, policymakers have debated how best to reduce the cost of protracted sovereign debt restructuring when emerging markets are in financial crisis. Two dominant approaches have emerged. One promotes changes in the bond contracts international lenders offer; in particular, it encourages the use of collective action clauses (CACs) rather than unanimous action clauses (UACs).

Precautionary Policies

2004 – 05

Carl E. Walsh | February 13, 2004

In a speech last month to the annual meeting of the American Economic Association, Fed Chairman Alan Greenspan said, “The Federal Reserve’s experiences over the past two decades make it clear that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape.” And he gave some examples of how the Fed made decisions about policy in the face of such uncertainty.

U.S. Monetary Policy: An Introduction.
Part 4: How does the Fed decide the appropriate setting for the policy instrument?

2004 – 04

Research Staff | February 6, 2004

The Fed’s job of stabilizing output in the short run and promoting price stability in the long run involves several steps. First, the Fed tries to estimate how the economy is doing now and how it’s likely to do in the near term—say, over the next couple of years or so.

U.S. Monetary Policy: An Introduction.
Part 3: How Does Monetary Policy Affect the U.S. Economy?

2004 – 03

Research Staff | January 30, 2004

The point of implementing policy through raising or lowering interest rates is to affect people’s and firms’ demand for goods and services. This section discusses how policy actions affect real interest rates, which in turn affect demand and ultimately output, employment, and inflation.

U.S. Monetary Policy: An Introduction.
Part 2: What are the goals of U.S. monetary policy?

2004 – 02

Research Staff | January 23, 2004

Monetary policy has two basic goals: to promote “maximum” sustainable output and employment and to promote “stable” prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act.

U.S. Monetary Policy: An Introduction.
Part 1: How is the Fed structured and what are its policy tools?

2004 – 01

Research Staff | January 16, 2004

U.S. monetary policy affects all kinds of economic and financial decisions people make in this country—whether to get a loan to buy a new house or car or to start up a company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in bonds, or in the stock market, for example. Furthermore, because the U.S. is the largest economy in the world, its monetary policy also has significant economic and financial effects on other countries.

Is There a Digital Divide?

2003 – 38

Rob Valletta and Geoffrey MacDonald | December 26, 2003

As more and more people use computers at home, at work, and at school, researchers have found that computer use has important implications for our material well-being. One finding, for example, is that people who use computers in the workplace tend to earn higher wages than those who do not, and available evidence suggests that this reflects, at least in part, the direct impact of skills that are associated with or acquired through computer use.

The Current Strength of the U.S. Banking Sector

2003 – 37

John Krainer and Jose A. Lopez | December 19, 2003

During the 2001 recession and the recovery, bank performance has been remarkably strong. To be sure, banks tightened their lending standards as the economy softened, lessening their exposures to problem areas such as the technology and telecommunications sectors.

Japanese Foreign Exchange Intervention

2003 – 36

Mark M. Spiegel | December 12, 2003

Pacific Basin Notes. This series appears on an occasional basis. It is prepared under the auspices of the Center for Pacific Basin Monetary and Economic Studies within the FRBSF’s Economic Research Department.

Monitoring Debt Market Information for Bank Supervisory Purposes

2003 – 35

John Krainer and Jose A. Lopez | November 28, 2003

Bank supervisors monitor bank holding companies (BHCs) in order to enforce regulations and gauge their soundness so as to guard against systemic risk in the financial system. This monitoring is chiefly conducted using supervisory resources, such as bank examinations and quarterly filings of balance sheet information.

Should the Fed React to the Stock Market?

2003 – 34

Kevin J. Lansing | November 14, 2003

The late 1990s witnessed the emergence of the greatest speculative bubble in financial market history. Investors bid up stock prices to unprecedented valuation levels as they extrapolated a temporary surge in corporate earnings growth far into the future.

The Bay Area Economy: Down but Not Out

2003 – 33

Mary Daly and Mark Doms | November 7, 2003

After being the quintessential darling of the nation’s economy, the San Francisco Bay Area has been battered by the information technology (IT) downturn; nearly one in ten jobs in the Bay Area has disappeared since the peak of late 2000, and half of those were in the IT sector. This Economic Letter explores the sources of the boom and bust in the Bay Area and puts the region’s recent contraction in the context of the U.S. and other regional IT centers.

The Natural Rate of Interest

2003 – 32

John C. Williams | October 31, 2003

A key question for monetary policymakers, as well as participants in financial markets, is: “Where are interest rates headed?” In the long run, economists assume that nominal interest rates will tend toward some equilibrium, or “natural,” real rate of interest plus an adjustment for expected long-run inflation.

Good News on Twelfth District Banking Market Concentration

2003 – 31

Liz Laderman | October 24, 2003

As the banking industry has consolidated in recent years, the number of banking organizations in the U.S. and in the Twelfth Federal Reserve District has declined dramatically. This consolidation trend raises public policy issues because of its implications for concentration and therefore competition in local banking markets.

Is Our IT Manufacturing Edge Drifting Overseas?

2003 – 30

Rob Valletta | October 10, 2003

The United States arguably is the world’s foremost producer of information technology (IT) products, and for many of these products, the U.S. defines the “leading edge,” or most advanced available technology. Within the U.S., the Twelfth District in particular specializes in IT production. However, amidst the current prolonged slowdown in worldwide IT spending, signs are emerging of a potential erosion of the U.S. competitive advantage.

Mortgage Refinancing

2003 – 29

John Krainer and Milton Marquis | October 3, 2003

One of the defining characteristics of the 2001 recession was the resilience of consumer expenditures. Many commentators have pointed to the housing market as one source of strength in consumption.

Earnings Inequality and Earnings Mobility in the U.S.

2003 – 28

Mary Daly and Rob Valletta | September 26, 2003

Rising inequality in individual earnings has been an important feature of the economic landscape in the United States in recent decades. The increased dispersion in yearly earnings has caused some to worry that a more permanent widening of the distribution has occurred.

The Fiscal Problem of the 21st Century

2003 – 27

Charles I. Jones | September 19, 2003

Last year, the Congressional Budget Office (CBO) released a remarkable report entitled A 125-Year Picture of the Federal Government’s Share of the Economy, 1950 to 2075. This report projects the future of government spending as a share of GDP assuming current policies remain in place, and the projections put forward are stunning: while the share has averaged about 19% since 1950, it is projected to rise drastically in coming decades, more than doubling to 39.7% by 2075.

Are We Running out of New Ideas? A Look at Patents and R&D

2003 – 26

Daniel Wilson | September 12, 2003

The question in the title arises from looking at the ratio of patents issued to dollars spent on research and development (R&D). Patents often are thought of as the fruition of R&D spending and as measures of technological progress.

The Present and Future of Pension Insurance

2003 – 25

Simon Kwan | August 29, 2003

In the last two years, a large number of defined benefit pension plans swung from record overfunding to record underfunding, exposing many workers and retirees to pension risk. The Pension Benefit Guarantee Corporation (PBGC), established by Congress in 1974, mitigates the pension risk to some extent by providing pension insurance.

Improving the Way We Measure Consumer Prices

2003 – 24

Tao Wu | August 22, 2003

Paying attention to consumer prices is a key aspect of central banks’ efforts to maintain low and stable inflation. However, measuring consumer prices is not a straightforward or unambiguous procedure.

Understanding State Budget Troubles

2003 – 23

Mary Daly | August 15, 2003

Fiscal 2004 started on July 1 this year, and it brought little solace to many lawmakers struggling to bring state and local spending back in line with revenues. On the heels of a difficult fiscal 2002 and a worse fiscal 2003, state budget leaders were forced to augment programs of temporary fixes—including deferrals, fund shifts, tapping reserves, and borrowing—with more permanent adjustments, such as slower spending growth and increased taxes and fees.

Disclosure as a Supervisory Tool: Pillar 3 of Basel II

2003 – 22

Jose A. Lopez | August 1, 2003

International efforts are underway to improve the regulation and supervision of banking institutions to reflect advances in financial risk management techniques. In April 2003, the Basel Committee on Banking Supervision (BCBS 2003a), headquartered at the Bank for International Settlements in Switzerland, released for public comment the new Basel Capital Accord, which will replace the 1988 Capital Accord.

Bank Lending to Businesses in a Jobless Recovery

2003 – 21

Milton H. Marquis | July 25, 2003

Bank lending to businesses tends to be procyclical, contracting with an economic slowdown and rising with an expansion. However, throughout both the recent recovery from recession and the recovery after the early 1990s recession, the volume of commercial and industrial (C&I) loans actually continued to contract.

Is Official Foreign Exchange Intervention Effective?

2003 – 20

Michael Hutchison | July 18, 2003

Many governments have intervened in foreign exchange markets to try to dampen volatility and to slow or reverse currency movements. Their concern is that excessive short-term volatility and longer-term swings in exchange rates that “overshoot” values justified by fundamental conditions may hurt their economies, particularly sectors heavily involved in international trade.

Pension Accounting and Reported Earnings

2003 – 19

Simon Kwan | July 4, 2003

The bursting of the stock market bubble has left many private defined benefit pension plans underfunded, raising some concerns about the effects on cash flows and, for a few firms, on financial soundness (see, for example, Kwan 2003). However, even as the asset value of corporate pension funds has eroded, firms sponsoring defined benefit plans have continued to report unusually low pension costs, because pension earnings have not fallen as much under the accounting rules for pension funds.

Financial Development, Productivity, and Economic Growth

2003 – 18

Diego Valderrama | June 27, 2003

Policymakers and economists generally agree that financial development—that is, well-functioning financial institutions and markets, such as commercial and investment banks, and bond and stock exchanges—contribute to economic growth. More debatable, however, have been issues about how financial development promotes growth. These issues would have an impact on choosing the design for financial policies and regulations.

Growth in the Post-Bubble Economy

2003 – 17

Kevin J. Lansing | June 20, 2003

The U.S. economy entered a recession in March 2001. The consensus view is that the recession ended sometime around December 2001.

Underfunding of Private Pension Plans

2003 – 16

Simon Kwan | June 13, 2003

The long bear market in stocks has led to a nearly $1 trillion shrinkage in the value of private pension fund assets: at the peak in 1999, these assets were worth $4.63 trillion; in 2002, they were worth $3.69 trillion. In the case of “defined contribution” plans, the burden of these losses fell on the beneficiaries rather than on the sponsoring firms.

What Makes the Yield Curve Move?

2003 – 15

Tao Wu | June 6, 2003

One common misperception about monetary policy is that the Federal Reserve controls all interest rates. In fact, the Fed controls only a very short-term rate, the federal funds rate; this is the rate banks charge each other for overnight loans of reserves.

Minding the Speed Limit

2003 – 14

Carl E. Walsh | May 30, 2003

Economists generally agree on the importance of low and stable inflation as a primary goal of monetary policy, as well as on the key role of inflation and forecasts of future inflation in providing critical signals to which the Fed needs to react. Economists also agree that the measure of real activity relevant for monetary policy is the gap between the level of actual output and an underlying trend level of output.

What Monetary Regime for Post-War Iraq?

2003 – 13

Mark M. Spiegel | May 9, 2003

Among the many challenges the new Iraqi government will face is the choice of a monetary regime that will promote price stability, an essential element in any well-functioning market economy. In forming its new government, Iraq has a rare opportunity to choose the monetary regime that will best suit its unique characteristics.

Finance and Macroeconomics

2003 – 12

Richard Dennis and Glenn D. Rudebusch | May 2, 2003

This Economic Letter summarizes papers presented at the conference “Finance and Macroeconomics” held at the Federal Reserve Bank of San Francisco on February 28 and March 1, 2003, under the joint sponsorship of the Bank and the Stanford Institute for Economic Policy Research.

Foreign Exchange Reserves in East Asia: Why the High Demand?

2003 – 11

Joshua Aizenman and Nancy Marion | April 25, 2003

Since the 1997-1998 Asian financial crises, monetary authorities in emerging markets in East Asia have more than doubled their stockpiles of foreign exchange reserves; by the end of May 2002, they held $845 billion, or 38% of the world total. Of these countries, China, Taiwan, Hong Kong, South Korea, and Singapore rank just behind Japan as the world’s biggest holders of foreign exchange reserves–together those five countries hold reserves totaling nearly $700 billion.

Time-Inconsistent Monetary Policies: Recent Research

2003 – 10

Richard Dennis | April 11, 2003

Over the past 20 years inflation in the U.S. economy has been relatively low, averaging about 2.5%; moreover, it has been relatively stable, with a standard deviation of just 1.0%. These statistics may give the impression that inflation has been tamed, or even beaten into submission.

Shifting Household Assets in a Bear Market

2003 – 09

Milton H. Marquis | March 28, 2003

As the bull market of the 1990s has turned into the bear market of the (early) 2000s, households have sharply reversed their more than decade-long trend of increasing their share of assets held in stocks. On balance, households have reallocated their assets away from stocks and toward tangible real assets, such as housing and other durable goods, as well as toward safe liquid financial assets, including cash, bank deposits, and money market mutual funds.

Technological Change

2003 – 08

Bharat Trehan | March 21, 2003

This Economic Letter summarizes the papers presented at the conference “Technological Change,” held at the Federal Reserve Bank of San Francisco on November 14-15, 2002, under the joint sponsorship of the Bank and the Stanford Institute for Economic Policy Research.

Economic Prospects for the U.S. and California: A Monetary Policymaker’s View

2003 – 07

Robert T. Parry | March 14, 2003

This Economic Letter is adapted from remarks by Robert T. Parry, President and CEO of the Federal Reserve Bank of San Francisco, delivered to the Stanford Institute for Economic Policy Research Associates on the campus of Stanford University on March 4, 2003.

House Price Bubbles

2003 – 06

John Krainer | March 7, 2003

The possibility of a “bubble” in house prices has received considerable attention lately. To be sure, house price appreciation has been strong in spite of the slowdown in the economy.

Extended Unemployment in California

2003 – 05

Rob Valletta | February 28, 2003

California’s labor market has not yet shown much sign of recovery from the recession that began in 2001. As in the rest of the nation, employment has been flat to down, the unemployment rate has remained at elevated levels, and the jobless are facing increasingly lengthy spells of unemployment.

Where to Find the Productivity Gains from Innovation?

2003 – 04

Daniel Wilson | February 21, 2003

The surge in U.S. productivity growth that began in the mid-1990s has generated considerable debate among economists. While most agree that the boom in information technology (IT) investment greatly contributed to this surge, many argue whether this contribution is mostly due to productivity gains in the manufacture of IT goods or whether the productivity gains “flowed downstream” from the IT manufacturers to the users of IT goods in other industries.

How Financial Firms Manage Risk

2003 – 03

Jose A. Lopez | February 14, 2003

Over the past several years, there has been a steady march toward financial integration across product lines among larger financial firms. The trend is in part due to the increasing globalization of financial markets, the development of new financial instruments, and advances in information technology.

Increased Stability in Twelfth District Employment Growth

2003 – 02

Liz Laderman | January 31, 2003

Since the mid-1980s, virtually all states in the nation have seen nonfarm employment growth rates become much more stable than they were in the 1960s, 1970s, and early 1980s. However, the volatility of employment growth has declined by different amounts in different regions.

Using Equity Market Information to Monitor Banking Institutions

2003 – 01

John Krainer and Jose A. Lopez | January 24, 2003

Bank supervisors and stock market investors engage in extensive monitoring of bank holding companies (BHCs), but for different reasons. While investors are looking to ensure that BHC managers maximize shareholder value, bank supervisors monitor BHCs to enforce regulations, gauge their safety and soundness, and guard against broader systemic risk.

Financial Issues in the Pacific Basin Region: Conference Summary

2002 – 38

Reuven Glick | December 27, 2002

This Economic Letter summarizes the papers presented at the conference “Financial Issues in the Pacific Basin Region” held at the Federal Reserve Bank of San Francisco on September 26-27, 2002, under the joint sponsorship of the Bank’s Center for Pacific Basin Monetary and Economic Studies and the Journal of the Japanese and International Economies.

Bank Security Prices and Market Discipline

2002 – 37

Simon Kwan | December 20, 2002

In recent years, policymakers and bank regulators have been warming up to the idea of leveraging market forces to enhance banking supervision. This is partly motivated by the growing complexity of large banking organizations and by concerns about limiting the cost of bank supervision as well as avoiding unduly extending the bank safety net (see Kwan 2002).

The Promise and Limits of Market Discipline in Banking

2002 – 36

Simon Kwan | December 13, 2002

A key issue on the agenda for bank regulators is how to leverage market discipline to supplement their supervisory efforts. For example, in the recently proposed revision of the Basel Capital Accord, market discipline is one of the three pillars, along with capital regulation and supervision, of the structure for safeguarding the banking system.

Recent Trends in Unemployment Duration

2002 – 35

Rob Valletta | November 22, 2002

The recession that began in early 2001 probably has ended, as national output grew moderately during the first three quarters of 2002. Unemployment, however, remains a problem. Between late 2000 and early 2002, the national unemployment rate increased by about 2 percentage points, from 3.9% to about 6%; this represents about 2.8 million additional individuals looking for work.

Riding the IT Wave: Surging Productivity Growth in the West

2002 – 34

Mary Daly | November 15, 2002

U.S. productivity growth surged in the latter half of the 1990s after nearly two decades of lackluster gains. Several states in the West were among the leaders in this productivity growth surge, posting average annual increases well above the rest of the U.S.

Productivity in the Twelfth District

2002 – 33

Daniel Wilson | November 8, 2002

Labor productivity, that is, real output per worker (or per worker hour), is a primary determinant of our long-run standard of living. More output per worker translates into higher profits, higher wages, or lower prices—or a combination of the three.

Stock Market Volatility

2002 – 32

John Krainer | October 25, 2002

In recent months, it has not been unusual to see the value of major stock indexes, such as the S&P 500, change by as much as 3% in a single day. Unfortunately for many investors, the general direction of those changes has been downward.

Learning from Argentina’s Crisis

2002 – 31

Ramon Moreno | October 18, 2002

Since December 2001, Argentina has suspended payments on its external debt, restricted bank deposit withdrawals, and abandoned a currency board arrangement that had pegged the peso to the U.S. dollar since 1991. Argentina faces inflation of over 70% this year and an economic contraction that rivals the U.S.’s Great Depression.

Setting the Interest Rate

2002 – 30

Milton Marquis | October 11, 2002

The Federal Reserve’s monetary policy goals are the maintenance of low inflation and sustainable output growth. Under current operating procedures, the Fed chooses a target for a short-term interest rate—specifically, the overnight federal funds rate, which is an overnight interbank lending rate—that is believed to be consistent with those policy goals.

Can the Phillips Curve Help Forecast Inflation?

2002 – 29

Kevin J. Lansing | October 4, 2002

During the early 1960s, many economists and policymakers believed that monetary policy could exploit a stable trade-off between the level of inflation and the unemployment rate. One version of the hypothesized trade-off, originally described by A.W. Phillips (1958) using U.K. data from 1861-1957, implied that policymakers could permanently lower the unemployment rate by generating higher inflation.

Japan Passes Again on Fundamental Financial Reform

2002 – 28

Thomas Cargill | September 27, 2002

Japan’s Prime Minister Koizumi came to power in April 2001, promising to deal aggressively with the problems that underlay the country’s economic and political instability. Since then, his reform efforts have met increasing resistance, the economy and financial system have yet to improve, and his public support has fallen.

Why Do Americans Still Write Checks?

2002 – 27

Gautam Gowrisankaran | September 20, 2002

In Europe and other industrialized parts of the world, electronic payment mechanisms have largely replaced checks. But in the U.S., paper checks are still very common, accounting for more than 60% of retail payments.

The Role of Fiscal Policy

2002 – 26

Carl E. Walsh | September 6, 2002

In recent weeks, a number of signs have appeared suggesting that the recovery of the U.S. economy from the recent recession is on a bumpy path. During the second quarter of 2002, real GDP grew at an anemic annual rate of barely over 1%, well below market expectations.

Argentina’s Currency Crisis: Lessons for Asia

2002 – 25

Mark Spiegel | August 23, 2002

This Economic Letter is based on a presentation Mark Spiegel prepared for a panel on “Optimal Currency Arrangements for Emerging Market Economies: The Experience of Latin America and Asia,” organized by the Latin American and Asian Economics and Business Association on July 15, 2002, in Tokyo, Japan.

On the Move: California Employment Law and High-Tech Development

2002 – 24

Rob Valletta | August 16, 2002

With the high-tech sector still mired in a slump, critical questions include where the industry will head next, and what role Silicon Valley will play in future waves of tech innovation and investment. The Internet and tech investment bust left many failed firms and thousands of unemployed workers in its wake in the Valley.

Technical Change and the Dispersion of Wages

2002 – 23

Bharat Trehan | August 9, 2002

In the last 25 years, the wage gap in the U.S. between highly skilled and less skilled workers has widened noticeably. For example, in 1975 the gap in average annual earnings between high school graduates and non-graduates was 26%; by 1999, the gap was 52%.

Using Chain-Weighted NIPA Data

2002 – 22

Charles I. Jones | August 2, 2002

This Economic Letter discusses a topic that at first glance appears to be boring and technical but that in fact turns out to be quite important: the proper interpretation of chain-weighted data. To illustrate, consider this simple question: What is the growth rate of real GDP?

Trends in the Concentration of Bank Deposits: The Northwest

2002 – 21

Liz Laderman | July 26, 2002

Two major trends affecting the structure of the banking industry since the mid-1980s have been tremendous consolidation and the liberalization of interstate banking. Consolidation has unambiguously increased concentration at the national level.

Productivity in Heart Attack Treatments

2002 – 20

Gautam Gowrisankaran | July 5, 2002

Health care spending is growing rapidly in the U.S. and, at 14% of GDP, is much larger than such spending in other industrialized countries. The increase in spending reflects not only changing U.S. demographics but also the use of new, and often costly, treatments, as well as institutional factors relating to health insurance and the structure of the health care industry.

Towards a Sovereign Debt Restructuring Mechanism

2002 – 19

Mark M. Spiegel | June 28, 2002

Over the 1990s, public and private international borrowers shifted the composition of their external financing—instead of relying primarily on loans from a syndicate of a few banks, they turned to issuing bonds. This has resulted in many more creditors of various kinds holding claims on sovereign debt in the forms of different debt instruments with different time horizons.

Country Crises and Corporate Failures: Lessons for Prevention and Management?

2002 – 18

Reuven Glick | June 14, 2002

The recent wave of financial crises in emerging markets—Mexico in 1994-1995, Asia in 1997-1998, Russia in 1998, and Argentina in 2001—has exacted a considerable toll in terms of lost output and welfare and at times even posed a threat to the stability of world financial markets. As a result, many policymakers and economists have focused on the lessons to be learned from these experiences—lessons both in how better to prevent crises in the first place and in how to manage crises once they occur.

Reforming China’s Banking System

2002 – 17

Ramon Moreno | May 31, 2002

Since the late 1970s, China has undertaken economic reforms that have liberalized agricultural production, allowed the growth of a dynamic private sector, and gradually opened the economy to international trade and foreign direct investment. As a result, China stands as one of the fastest growing economies in the world.

Searching for Value in the U.S. Stock Market

2002 – 16

Kevin J. Lansing | May 24, 2002

The Standard & Poor’s (S&P) 500 stock index closed at an all-time high of 1527 on March 24, 2000. Since then, the index has declined by about 28% to 1097 as of May 14, 2002, roughly where it was four years ago.

Off-Site Monitoring of Bank Holding Companies

2002 – 15

John Krainer and Jose A. Lopez | May 17, 2002

Bank supervisors engage in extensive monitoring of banking organizations in order to enforce regulations and to guard against systemic risk. In the United States, primary responsibility for monitoring bank holding companies (BHCs) falls to the Federal Reserve.

Deposit Insurance Reform—When Half a Loaf Is Better

2002 – 14

Fred Furlong and Simon Kwan | May 10, 2002

When it comes to compromise, we can take comfort in the old saying, “half a loaf is better than none.” But when it comes to legislation on deposit insurance reform now before Congress, that old saying takes a new twist: “half a loaf is even better than a whole loaf.”

House Price Dynamics and the Business Cycle

2002 – 13

John Krainer | May 3, 2002

It is somewhat surprising that house prices in most parts of the nation have stayed high despite the downturn in the economy. As Figure 1 shows, real (inflation-adjusted) house price changes became negative with GDP growth during the last recession in 1991; but this time, they have remained positive and appear to be firm.

Is There a Credit Crunch?

2002 – 12

Simon Kwan | April 26, 2002

Recently, some concerns about a “credit crunch” in the U.S. economy have appeared in the business press. In the commercial paper market, a number of large firms were reportedly unable to borrow from this market, as investors reassessed the credit risk of these firms amid growing accounting concerns.

Macroeconomic Models for Monetary Policy

2002 – 11

Glenn D. Rudebusch and Tao Wu | April 19, 2002

This Economic Letter summarizes the papers presented at the conference “Macroeconomic Models for Monetary Policy” held at the Federal Reserve Bank of San Francisco on March 1-2, 2002, under the joint sponsorship of the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research.

Inferring Policy Objectives from Policy Actions

2002 – 10

Richard Dennis | April 5, 2002

There is little doubt that when central banks, including the Federal Reserve, set interest rates, they do so purposefully, with particular goals and objectives in mind. But what are these goals and objectives? And if the Federal Reserve behaves systematically, what is it systematically responding to?

What’s Behind the Low U.S. Personal Saving Rate?

2002 – 09

Milton Marquis | March 29, 2002

In recent years, the personal saving rate in the United States has fallen sharply, and it is now at a very low level compared either to U.S. historical experience or to the savings behavior of many other industrialized countries. From 1980 through 1994, the U.S. saving rate averaged 8%; thereafter, it fell steeply, and since mid-2000, with allowance made for the tax rebates that boosted household saving in the months of July, August, and September 2001, it has averaged approximately 1%.

The Changing Budget Picture

2002 – 08

Carl E. Walsh | March 22, 2002

In January 2001, the Congressional Budget Office (CBO) reported that the federal government was projected to run a $313 billion surplus in 2002. Now, just a little over a year later, the CBO’s latest reports indicate a major deterioration in the budget projections.

Predicting When the Economy Will Turn

2002 – 07

Prakash Loungani and Bharat Trehan | March 15, 2002

Are turning points in the economy—recessions and recoveries—hard to predict? Recent experience may not tell us much: although almost no forecaster predicted the onset of the latest U.S. recession, unusual forces may have been at work this time around. But what about more typical recessions? And what about recoveries?

Recession in the West: Not a Rerun of 1990-1991

2002 – 06

Mary Daly and Lily Hsueh | March 8, 2002

The Twelfth District’s extraordinary expansion ended abruptly in 2001, as the downturn in the information technology (IT) sector and the September 11 terrorist attacks combined to damp employment growth in nearly every District state and end the West’s reign as the fastest growing region in the nation.

ETC (embodied technological change), etc.

2002 – 05

Daniel Wilson | March 1, 2002

The sources of labor productivity growth in the U.S. economy have been the subject of much study. Understanding these sources is important because labor productivity growth is the key to increasing our economic standard of living.

Profile of a Recession—The U.S. and California

2002 – 04

Mary Daly and Fred Furlong | February 22, 2002

In the U.S., we spent much of last year wondering whether the economy was in recession or simply pausing after years of extraordinary growth. In California, the recession picture was even less clear, with widespread weakness in the San Francisco Bay Area, but more stable conditions in the much larger Southern California economy.

Is There a Role for International Policy Coordination?

2002 – 03

Paul Bergin | February 8, 2002

As the U.S. struggles with its first economic slowdown in a decade, so do most of the major industrialized countries. Japan is sliding again into recession, with third quarter GDP growth of -2.2%. Europe also seems to be slowing, with a third quarter growth rate of 0.4% for the euro area as a whole, and -0.6% for Germany in particular.

What Is Operational Risk?

2002 – 02

Jose A. Lopez | January 25, 2002

Financial institutions are in the business of risk management and reallocation, and they have developed sophisticated risk management systems to carry out these tasks. The basic components of a risk management system are identifying and defining the risks the firm is exposed to, assessing their magnitude, mitigating them using a variety of procedures, and setting aside capital for potential losses.

Competition and Regulation in the Airline Industry

2002 – 01

Gautam Gowrisankaran | January 18, 2002

The events of September 11 have had some of their worst economic effects on the airline industry, leading to a dramatic fall-off in passenger demand and substantially higher costs. But even before that day, the industry was facing bad times, with few airlines anticipating profitable performances in 2001. Some have argued that deregulation has contributed to the industry’s problems, and, furthermore, to problems for passengers.

Subprime Mortgage Lending and the Capital Markets

2001 – 38

Liz Laderman | December 28, 2001

Subprime mortgage lending has grown tremendously since the early 1990s and now constitutes a significant fraction of the overall mortgage market. This Economic Letter defines subprime mortgage lending, describes its growth, and presents evidence on the link between this market and the capital markets. This link should help encourage the flow of funds into subprime lending, thereby encouraging competition in this important market segment.

Financial Modernization and Banking Theories

2001 – 37

Simon Kwan | December 21, 2001

Financial innovation has greatly changed the business of banking. Instead of just accepting deposits and making loans the old-fashioned way, banks nowadays are increasingly active in lending without putting loans on their balance sheets, through either securitization of their asset portfolio or outright loan sales.

The Economic Return to Health Expenditures

2001 – 36

Charles I. Jones | December 14, 2001

“Runaway” expenditures on health in the United States and what to do about them have been a feature of congressional debate for years. In 1998, the United States spent 13.6% of its GDP on goods and services associated with health care.

The U.S. Economy after September 11

2001 – 35

Robert T. Parry | December 7, 2001

This Economic Letter is adapted from remarks by Robert T. Parry, President and CEO of the Federal Reserve Bank of San Francisco, delivered on November 19, 2001, to the 24th Annual Real Estate and Economics Symposium sponsored by U.C. Berkeley’s Fisher Center for Real Estate and Urban Economics.

Financial Instruments for Mitigating Credit Risk

2001 – 34

Jose A. Lopez | November 23, 2001

Financial derivatives have greatly enhanced the range of tools available for managing financial risks. Currently, derivatives are widely used to mitigate and reallocate the financial risk related to changes in interest rates, exchange rates, stock prices, and commodity prices.

Rising Junk Bond Yields: Liquidity or Credit Concerns?

2001 – 33

Simon Kwan | November 16, 2001

Economists and other analysts look for signs of the economy’s current and future performance in many places, including the bond market. One recent signal from that market that may prove useful involves the spread in the yields between junk bonds and other long-term debt instruments.

Information Technology and Growth in the Twelfth District

2001 – 32

Mary Daly | November 9, 2001

The Twelfth District includes the nine westernmost states and has some of the nation’s leading technology centers. Over the past several years, robust growth among information technology (IT) firms has fueled gains in output, employment, and earnings and helped the District economy expand more rapidly than the rest of the nation.

Quantitative Easing by the Bank of Japan

2001 – 31

Mark Spiegel | November 2, 2001

In the wake of continued weakness in the Japanese economy and recent market turbulence due to the terrorist attacks in the U.S., the Bank of Japan (BOJ) recently increased the intensity of its quantitative easing program, which it had begun in March of this year. The BOJ initially switched from the usual approach to expansionary monetary policy—namely, a reduction in the target short-term interest rate—to quantitative easing because by that time it had been pursuing a target very close to zero (0.15%).

Banking and the Business Cycle

2001 – 30

John Krainer | October 26, 2001

The banking industry performed exceptionally well during the strong economic expansion of the past five years. Strong demand for loans and banking services and the strong supply of quality customers helped boost bank earnings.

Has a Recession Already Started?

2001 – 29

Glenn D. Rudebusch | October 19, 2001

Recession fears greatly intensified after the terrorist attack of September 11, 2001. In a Blue Chip survey of business economists taken one week later, 82% answered yes to the question “Is the U.S. economy currently in a recession?”

Unemployment and Productivity

2001 – 28

Bharat Trehan | October 12, 2001

During the latter half of the 1990s, productivity grew at almost twice the pace of the preceding ten years. Widely attributed to developments in the information technology sector, this surge in productivity was accompanied by an unemployment rate that dropped to unusually low levels.

Natural Vacancy Rates in Commercial Real Estate Markets

2001 – 27

John Krainer | October 5, 2001

With the slowing economy, vacancy rates in commercial real estate markets have risen sharply over the last two quarters. Nowhere is this more evident than in the Twelfth District, where vacancy rates in the key high-tech markets (San Francisco, San Jose, and Seattle) have increased four-fold since the fourth quarter of 2000.

Transparency in Monetary Policy

2001 – 26

Carl E. Walsh | September 7, 2001

The title of a popular 1987 book by William Greider on the Federal Reserve said it all: Secrets of the Temple conjured up an image of the high priests of monetary policy hidden away behind marble walls in Washington, D. C., making mysterious decisions that affected the lives of all Americans. While the Fed’s policymaking body, the Federal Open Market Committee (FOMC), would eventually release minutes of its meetings, and the Chairman did testify twice a year before Congress and would frequently give public speeches, that image of secrecy was one that central bankers often seemed to enjoy cultivating.

Capital Controls and Emerging Markets

2001 – 25

Ramon Moreno | August 31, 2001

The financial crises in the 1990s resurrected the debate on whether emerging markets should stay open to foreign capital or impose capital controls. The stakes are high.

Recent Research on Sticky Prices

2001 – 24

Bharat Trehan | August 24, 2001

Broadly speaking, the papers at the conference were concerned with modeling the effects of policy in an economy with nominal rigidities—that is, with prices and wages that are relatively inflexible, or “sticky.” One set of papers focused on determining the characteristics that a model economy would require to plausibly reproduce the observed behavior of key macroeconomic variables such as output and inflation, especially in response to a monetary policy shock.

Federal Reserve Banks’ Imputed Cost of Equity Capital

2001 – 23

Jose A. Lopez | August 10, 2001

The Federal Reserve System is an important participant in the nation’s payments system—the infrastructure used for transmitting payments among individuals, firms and government entities. For example, according to the Rivlin report of 1998, the twelve Federal Reserve Banks processed about one-third of the estimated 45 billion checks transferred between banks in the United States in 1996.

Productivity in Banking

2001 – 22

Fred Furlong | July 27, 2001

The banking sector has posted strong growth in labor productivity for almost two decades. The shift in trend productivity growth for banking predates by more than a decade the much-touted New Economy productivity shock of the second half of the 1990s, which is most often associated with advances in information technology (IT).

Capital Controls and Exchange Rate Stability in Developing Countries

2001 – 21

Reuven Glick and Michael Hutchison | July 20, 2001

In the wake of the East Asian, Russian, and Brazilian currency crises of the 1990s, a growing chorus of observers and economists (for example, Radelet and Sachs 1998, and Stiglitz 2000) has argued that an underlying cause of – or at least a contributing factor to – such disruptions is the liberalization of international capital flows, especially when combined with fixed exchange rates. A common policy prescription that follows from this argument is to impose restrictions on capital flows and other international payments with the hope of insulating economies from speculative attacks and thereby creating greater currency stability.

Fiscal Policy and Inflation

2001 – 20

Betty C. Daniel | July 13, 2001

The recent passage of a tax cut package in the U.S. raises an interesting and important question for monetary policy: Will the tax cuts create inflation that the Fed cannot contain? According to conventional wisdom, the answer is “no.” So long as a central bank is independent and well run, it can control inflation, irrespective of the stance of fiscal policy.

Update on the Economy

2001 – 19

Robert T. Parry | July 6, 2001

This Economic Letter is adapted from several recent presentations by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, to civic and professional organizations in California.

Asset Prices, Exchange Rates, and Monetary Policy

2001 – 18

Glenn D. Rudebusch | June 15, 2001

This Economic Letter summarizes the papers presented at the conference “Asset Prices, Exchange Rates, and Monetary Policy” held at Stanford University on March 2-3, 2001, under the joint sponsorship of the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research.

The Stock Market: What a Difference a Year Makes

2001 – 17

Simon Kwan | June 1, 2001

Stock prices have been on an extraordinary ride in the last two and a half years, soaring to phenomenal heights and then plunging at head-spinning rates. At their peaks, the NASDAQ composite and the S&P 500 were up 579% and 233%, respectively, compared to the beginning of 1995.

Monetary Policy and Exchange Rates in Small Open Economies

2001 – 16

Richard Dennis | May 25, 2001

Controlling inflation is a key concern of central bankers around the world. But how best to control inflation differs across countries according to their individual characteristics; for example, small open economies tend to import more goods as a percentage of GDP than larger, more closed, economies, such as the United States.

Japan’s New Prime Minister and the Postal Savings System

2001 – 15

Thomas F. Cargill and Naoyuki Yoshino | May 18, 2001

On April 26, 2001, Junichiro Koizumi was elected Prime Minister of Japan by the Parliament, winning a popular mandate to reform the ruling Liberal Democratic Party (LDP) and lead the country out of a decade of economic and financial distress. Koizumi is known as a maverick—a title of honor he will richly deserve if his proposal to privatize Japan’s Postal Savings System (PSS) succeeds: It would represent the most significant and difficult structural change in Japanese finance in the postwar period.

The Future of the New Economy

2001 – 14

Charles I. Jones | May 11, 2001

The increase in productivity growth rates beginning in the mid-1990s has helped boost economic growth and speed the rate at which living standards rise in the United States. Between 1995 and 2000, productivity growth averaged 2.8%—almost double the rate during the preceding 22 years! This increase in productivity growth is thought by many observers to be associated with the increased importance of information technology (IT), a hypothesis often referred to as the “New Economy” view.

The Science (and Art) of Monetary Policy

2001 – 13

Carl E. Walsh | May 4, 2001

During most of the 1990s, the United States experienced exceptionally good times, and the Federal Reserve received some of the credit for the booming economy and low inflation.

Modeling Credit Risk for Commercial Loans

2001 – 12

Jose A. Lopez | April 27, 2001

In the past few years, there have been several developments in the field of modeling the credit risk in banks’ commercial loan portfolios. Credit risk is essentially the possibility that a bank’s loan portfolio will lose value if its borrowers become unable to pay back their debts.

Rising Price of Energy

2001 – 11

Mary Daly and Fred Furlong | April 20, 2001

Wholesale prices of natural gas and electricity have risen dramatically in the West in recent months. These wholesale price increases are showing through to rates paid by households, particularly in the unregulated retail market for natural gas.

Uncertainties in Projecting Federal Budget Surpluses

2001 – 10

Kevin J. Lansing | April 13, 2001

In January 2001, the non-partisan U.S. Congressional Budget Office (2001a) issued updated federal budget projections for fiscal years 2002 through 2011. According to the CBO’s baseline projections, the federal government will accumulate $5.6 trillion in total surpluses over the coming decade.

What’s Different about Banks—Still?

2001 – 09

Milton Marquis | April 6, 2001

New financial instruments, new information technologies, and a new regulatory environment have blurred the distinctions between commercial banks and nonbank financial intermediaries in the U.S. in recent years. Furthermore, just as many nonbank financial institutions have increased their use of securitization, commercial banks also have shifted their emphasis from on-balance sheet to off-balance sheet activities (Boyd and Gertler 1994).

How Costly Are IMF Stabilization Programs?

2001 – 08

Michael Hutchison | March 30, 2001

After the 1997 balance of payments problems and currency crises that hit Korea, Indonesia, Thailand, and other countries, the stabilization programs supported by the International Monetary Fund (IMF) came under critical fire. At issue was the cost of these programs in terms of forgone output and employment in the countries that adopted them. Stiglitz (2000), for example, argued that “…the IMF’s economic ‘remedies’ often make things worse—turning slowdowns into recessions and recessions into depressions.” Similar statements by other leading economists have been commonplace.

Financial Crises in Emerging Markets

2001 – 07

Reuven Glick, Ramon Moreno, and Mark Spiegel | March 23, 2001

The causes of the currency crises in emerging markets during the late 1990s have been the subject of much debate—especially considering that, before the crises, many of the Asian countries involved tended to have balanced budgets and generally sound macroeconomic performance. Some observers argue that the generally favorable macroeconomic conditions indicate that the crises were not caused by incompatibility between fiscal and monetary policies and exchange rate pegs, but rather by the unexpected and self-fulfilling panics of foreign investors.

The Return of the “Japan Premium”: Trouble Ahead for Japanese Banks?

2001 – 06

Mark Spiegel | March 9, 2001

In January of 2001, overseas financial markets saw the re-emergence of the “Japan premium,” a term used to describe the extra interest charged on offshore loans to Japanese banks relative to similarly risky banks from other developed countries. So far, the magnitude of the Japan premium has been small, never exceeding 0.05% and 0.07%, depending on the bank examined.

How Sluggish Is the Fed?

2001 – 05

Glenn D. Rudebusch | March 2, 2001

How quickly does the Fed adjust monetary policy in response to developments in the economy? A common view among economists is that the Fed changes the short-term policy interest rate at a very sluggish pace over several quarters.

Economic Impact of Rising Natural Gas Prices

2001 – 04

Mary Daly | February 9, 2001

Natural gas prices have risen significantly in recent months, surpassing nearly all forecasts. In December, the spot price at the Henry Hub—the benchmark for U.S. natural gas prices—averaged $6.31 per million British Thermal Units (MMbtu), more than three times the average spot price one year earlier.

Inflation: The 2% Solution

2001 – 03

Milton Marquis | February 2, 2001

By the beginning of the 1980s, double-digit rates of inflation had become so pervasive among industrialized economies that they were viewed as a major deterrent to global economic growth. Since then, an explicit policy goal of low inflation has become a mantra for policymakers, and many countries, such as the U.K., New Zealand, Australia, Japan, Sweden, and the eleven countries under the European Central Bank (ECB), have enacted fundamental reforms to achieve that goal.

Retail Sweeps and Reserves

2001 – 02

John Krainer | January 26, 2001

Since 1994, depository institutions have been able to lower required reserves without affecting customer liquidity by periodically reclassifying balances from retail transactions deposits into savings accounts. This practice, known as “sweeping,” has grown rapidly in the last six years, and, as a result, reserve requirements as a percentage of total liquid deposits have fallen dramatically.

Will Inflation Targeting Work in Developing Countries?

2001 – 01

Kenneth Kasa | January 12, 2001

Economists are often accused of not agreeing with each other. Believe it or not, the 1990s may have produced an exception.

East Asia: Recovery and Restructuring

2000 – 38

Ramon Moreno | December 29, 2000

More than three years have passed since the collapse of the Thai baht triggered a wave of currency and financial crises in East Asia. After experiencing sharp economic contraction in 1998, East Asian economies have rebounded strongly, buttressed by rapid growth in their exports to the United States.

Should We Worry about the Large U.S. Current Account Deficit?

2000 – 37

Paul Bergin | December 22, 2000

Over the last year the U.S. current account deficit has reached unprecedented levels. Figure 1 illustrates this by charting the falling trajectory of the current account balance, which essentially measures net exports of goods and services plus net income received from foreign investments.

California IPO Wealth Effects: What’s Left?

2000 – 36

Fred Furlong and Joe Mattey | December 8, 2000

The year 2000 has been sobering for investors in firms that have had initial public offerings, or IPOs, in recent years. Those investors include, of course, employees holding stocks and stock options in these firms.

Patterns in the Foreign Ownership of U.S. Banking Assets

2000 – 35

Jose A. Lopez | November 24, 2000

During the 1990s, the global economy experienced a major increase in trade and cross-border business activity, which created a greater demand for international financial services. Consequently, many commercial banks increased their cross-border activities, both to service their domestic customers and to gain new foreign customers.

Information Technology and Productivity

2000 – 34

Casey Cornwell and Bharat Trehan | November 10, 2000

Productivity growth in the U.S. has picked up noticeably in recent years. From 1996 to 1999, average labor productivity, or ALP, in the private, nonfarm U.S. economy grew at a 2.8% annual rate, more than twice the rate that prevailed between 1980 and 1995.

The Shipping News: Western Exports Rebound

2000 – 33

Mary Daly and Carol D’Souza | November 3, 2000

After more than two years of weakness, exports from the West have begun to rebound. The recent pickup is due in large part to the economic resurgence of a number of trading partners of western states and to rapid growth in world demand for a variety of high-tech manufactured products.

Has Bank Performance Peaked?

2000 – 32

Simon Kwan | October 27, 2000

After several years of rising to ever greater heights, bank profits took a dive in the second quarter, with return on assets (ROA) falling to 1.0%, the lowest it has been since 1992 (see Table “Banks Headquartered by Region”). The reason: poor performance at large banks, which had an ROA of 0.94%.

Monetary Policy in a New Environment: The U.S. Experience

2000 – 31

Robert T. Parry | October 13, 2000

This Economic Letter is adapted from a presentation by Robert T. Parry, President and CEO of the Federal Reserve Bank of San Francisco, to the conference “Recent Developments in Financial Systems and Their Challenges for Economic Policy” sponsored by the Bank for International Settlements and The Deutsche Bundesbank September 29, 2000, in Frankfurt, Germany.

Knightian Uncertainty and Home Bias

2000 – 30

Kenneth Kasa | October 6, 2000

More Americans than ever buy foreign goods, own foreign stocks, and work for foreign corporations. The U.S. economy is undoubtedly becoming more “globalized.”

Does Pegging Increase International trade?

2000 – 29

Ramon Moreno | September 29, 2000

The currency crises of the 1990s appeared to reinforce the view that, in the long run, all currency pegs are unsustainable. And yet, pegged regimes maintain their attraction. For example, Calvo and Reinhart (2000) find evidence that many countries intervene to smooth fluctuations in the exchange rate even while they claim to be floating.

Recent Declines in Work and Income among Men with Disabilities

2000 – 28

Mary Daly, Richard Burkhauser and Andrew Houtenville | September 22, 2000

It is by now conventional wisdom that the economic expansion during the 1990s was both broad and deep, reaching Americans of all races, ethnicities, and income levels. However, this Economic Letter summarizes recent research by Burkhauser, Daly, and Houtenville (forthcoming and 2000, hereafter BDH) which shows that for the nearly 10% of the working-age population with disabilities, strong economic growth during the 1990s did not produce higher rates of employment or rapid income gains.

Tech Stocks and House Prices in California

2000 – 27

John Krainer and Fred Furlong | September 15, 2000

The San Francisco Bay Area is notable for its concentration of high-tech firms. The Bay Area also has experienced a sharp appreciation in house prices in recent years. Part of the explanation for the soaring house prices may lie in the so-called “wealth effect.”

Short-term International Borrowing and Financial Fragility

2000 – 26

Mark M. Spiegel | September 8, 2000

In the wake of the large number of international financial crises that occurred in the 1990s, several proposals have been put forth to reform the “international financial architecture,” that is, the institutional features that characterize the international monetary system. These proposals aim to make the system less prone to financial crises in the future.

Have Californians Kept Up in the 1990s?

2000 – 25

Mary Daly | August 25, 2000

Although by most measures the California economy has been outperforming the U.S. economy for nearly five years, a number of statistics on family income suggest that Californians are losing ground relative to others in the U.S. Data on income growth show that while median family income outside of California grew by more than 8% between 1989 and 1998, median family income in California declined by 4%.

Should Central Banks Stabilize Prices?

2000 – 24

Carl E. Walsh | August 11, 2000

Twenty years ago, the policy problem facing many central banks was obvious–inflation was too high and needed to be reduced. Identifying the problem did not mean it was easy to solve. Debate centered on the potential real output and unemployment costs of reducing inflation, on whether a gradual disinflation or a more rapid one would be least costly, and on how central banks could credibly commit to carrying through a disinflation once begun.

B2B E-commerce in Residential Mortgages

2000 – 23

Joe Mattey | July 28, 2000

Internet-related technology is part of many industries, including the residential mortgage business. At first, e-commerce innovations mainly involved the business-to-consumer (B2C) segment in electronically soliciting and submitting mortgage applications. More recently, business-to-business (B2B) mortgage transactions have come into the e-commerce world.

What Explains Capital Flows?

2000 – 22

Ramon Moreno | July 21, 2000

Capital flows between countries can yield significant benefits. They allow investors to diversify their risks and increase returns, and they allow residents of recipient countries to finance rapid rates of investment and economic growth, as well as to increase consumption.

Exploring the Causes of the Great Inflation

2000 – 21

Kevin J. Lansing | July 7, 2000

Over the past year, the Federal Reserve has been raising short-term interest rates. These rate hikes are designed to prevent inflation from trending upward from the low levels enjoyed by U.S. consumers over the past several years.

Evaluating the Stock Market

2000 – 20

Bharat Trehan | June 23, 2000

Since the 1980s, U.S. stock markets have soared, and stock prices now are at levels that were unimaginable before the boom started. There has been no shortage of speculation about the reasons for this performance.

Japan’s Recession: Is the Liquidity Trap Back?

2000 – 19

Michael Hutchison | June 16, 2000

Since the early 1990s, rising unemployment, price deflation, sluggish growth, and even recession have beleaguered Japan. The country’s central bank, the Bank of Japan (BOJ), has responded by lowering interest rates to stimulate demand.

The Composition of International Capital Flows

2000 – 18

Kenneth Kasa | June 2, 2000

Although currency crises may not be predictable, what is predictable is that after each one there will be calls to reform the “international financial architecture.” One proposal currently making the rounds is to stabilize capital flows with policies that either encourage “long-term” capital flows or discourage “short-term” capital flows.

Why Has the Fed Been Raising Interest Rates?

2000 – 17

Robert T. Parry | May 26, 2000

This Economic Letter is adapted from a keynote address delivered by Robert T. Parry, President and CEO of the Federal Reserve Bank of San Francisco, to the 28th Annual Northern California Financial Planning Conference in San Francisco on May 9, 2000.

Dollarization as a Technology Import

2000 – 16

Alan M. Taylor | May 19, 2000

The debate over dollarization has arisen in several countries, but it is often at its most fervent in Argentina. In that country, a decade of currency board experience with dollar-peso convertibility has brought the economy as close to being dollarized as one can be without going all the way.

Three Questions about “New Economy” Stocks

2000 – 15

Simon Kwan | May 12, 2000

From January 1995 through the third week of April 2000, the Dow Jones Industrial Average (DJIA) advanced a respectable 184%. Even though this venerable index has included tech firms over the last few years–most recently Intel and Microsoft in 1999–it still is taken by many to represent the industrial heavyweights of the so-called old economy.

Small California Banks Holding On

2000 – 14

Elizabeth Laderman | May 5, 2000

A cursory look at the data on bank profitability suggests that, since the end of 1995, small banks headquartered in California have been significantly less profitable than medium-sized banks in the state. In addition, it appears that small bank performance in California lags that of small banks in the rest of the country.

Structural Change and Monetary Policy

2000 – 13

Glenn D. Rudebusch | April 28, 2000

This Economic Letter summarizes the papers presented at the conference “Structural Change and Monetary Policy” held in San Francisco on March 3-4, 2000, under the joint sponsorship of the Federal Reserve Bank of San Francisco and Stanford University’s Stanford Institute for Economic Policy Research.

Global Financial Change and the Transformation of Banking in Post-Communist Countries: Principles and Parallels

2000 – 12

Robert T. Parry | April 14, 2000

This Economic Letter is adapted from a speech delivered by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco at the European Banking and Financial Forum in Prague, the Czech Republic, on March 29, 2000, in a panel discussing financial globalization, international financial institutions, and developments in the financial sectors of post-communist countries.

Inflation Targeting for the Bank of Japan?

2000 – 11

Mark M. Spiegel | April 7, 2000

The Japanese government and the Bank of Japan (BOJ) are both considering the merits of conducting that nation’s monetary policy by pursuing an explicit inflation target. However, they seem to view inflation targeting as a means to quite different ends, which leads them to different conclusions about the proper timetable for a move towards such a regime.

The Gramm-Leach-Bliley Act and Financial Integration

2000 – 10

Fred Furlong | March 31, 2000

After more than two decades of debate, full affiliation of commercial banking with other financial services became a reality in March 2000. The Gramm-Leach-Bliley Act (GLBA), signed into law last November, authorized the certification of financial holding companies, the structure that looks to be the main vehicle for linking commercial banks with securities firms, insurance firms, and merchant banking.

Margin Requirements as a Policy Tool?

2000 – 09

Simon Kwan | March 24, 2000

The recent rise in margin credit has focused attention on the Federal Reserve’s margin requirements for purchasing equities with borrowed funds, which has been at 50% since 1974. In November and December of 1999, margin credit grew very rapidly, outpacing the sizable appreciation in the overall stock market.

Uncertainty and Monetary Policy

2000 – 08

Carl E. Walsh | March 17, 2000

Uncertainty is pervasive in the policy environment the Federal Reserve faces as it strives to promote economic stability and low inflation. The economic situation in the U.S. today shows that, even in the best of times, making monetary policy isn’t easy.

California’s IPO Gold Rush

2000 – 07

Joe Mattey | March 10, 2000

The rush to find gold brought about 100,000 people to California from 1847 to 1849. A century and a half later, many Californians participated in another rush to entrepreneurial gold. But this time, Californians prospected for firms that would hire them as employees and allow them to share in the bounty of a successful initial public offering (IPO) of equity.

Measuring Available and Underutilized Labor Resources

2000 – 06

Rob Valletta | March 3, 2000

The U.S. unemployment rate averaged 4.2% in 1999, and dropped to 4.0 % in January 2000, the lowest rate recorded since January 1970. The sustained labor market tightness in this expansion has raised concerns that a shrinking pool of available labor may constrain firms’ ability to expand employment and output further.

How Fast Can the New Economy Grow?

2000 – 05

Glenn D. Rudebusch | February 25, 2000

The growth rate of the potential supply of output–“potential output” for short–determines the long-run sustainable pace of economic expansion and is thus an important consideration for monetary policymakers. For example, as noted in the Federal Reserve press release following the most recent meeting of the Federal Open Market Committee: “The Committee remains concerned that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth.

Volatility Spillovers in the U.S. Treasury Market

2000 – 04

Jose A. Lopez | February 18, 2000

The U.S. Treasury market is the largest and most active debt market in the world with about $3.6 trillion of tradable securities outstanding as of September 1999. Treasury securities are traded almost around the clock, starting in Tokyo, then moving to London, and then on to New York. Given this market structure, the prices and hence the yields on Treasury securities can readily incorporate economic announcements and other developments when they become known.

Do Currency Unions Increase Trade? A "Gravity" Approach

2000 – 03

Andrew Rose | February 4, 2000

In 1999, eleven European nations created a common currency zone, known as the European Economic and Monetary Union (EMU). These countries have relinquished national monetary control and adopted the euro as their official currency.

REITs and the Integration between Capital Markets and Real Estate Markets

2000 – 02

John Krainer | January 28, 2000

Traditionally, commercial real estate financing has not been well integrated with capital markets. Ownership has been concentrated, with wealthy individuals and large institutions such as insurance companies and pension funds as the primary investors in commercial real estate.

Measuring Interest Rate Risk for Mortgage-Related Assets

2000 – 01

Joe Mattey | January 1, 2000

Measuring interest rate risk–that is, the risk that interest rate fluctuations might impair a firm’s profitability or viability–is important both to financial institutions and to their regulators. Generally, methods for measuring interest rate risk focus on the duration of financial instruments, which is one way to characterize the sensitivity of their values to interest rate changes.

Financial Modernization and Regulation

1999 – 38

Fred Furlong and Simon Kwan | December 31, 1999

The push to liberalize and modernize financial systems worldwide has marked the last two decades and is sure to continue into the next century. One of the key policy issues it raises is how financial supervisors and regulators should adapt to the new and emerging order.

Is There a Case for an Asian Monetary Fund?

1999 – 37

Andrew Rose | December 17, 1999

Currency crises are troubling events. They tend to spread from country to country in a region, leaving the hardship of recession–and, consequently, the risk of protectionism–in their wake. Currently, the problems of currency crises are addressed by assistance from the International Monetary Fund (IMF), which arranges rescue packages on a case by case basis.

Why Attack a Currency Board?

1999 – 36

Kenneth Kasa | November 26, 1999

On October 23, 1997, a massive speculative attack took place against the Hong Kong dollar. Interbank interest rates soared into triple digits, and one-month interest rates hit 50%.

Are We Globalized Yet?

1999 – 35

Charles Engel | November 19, 1999

The buzzword in popular international economics in the 1990s is “globalization.” And there’s no doubt that financial markets have become increasingly integrated internationally.

Rates of Return from Social Security

1999 – 34

Kevin J. Lansing | November 12, 1999

Under the current Social Security law, 10.7% of nearly every U.S. employee’s gross annual wage (up to a maximum of $72,600) must be “contributed” to the Old Age and Survivor’s Insurance (OASI) program. For many individuals, these contributions represent the most important (and perhaps only) investment they will make to provide financial support for themselves during retirement.

Risks in the Economic Outlook

1999 – 33

Robert T. Parry | October 29, 1999

This Economic Letter is adapted from a speech delivered by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, at the Annual Meeting of the National Association of Business Economists on September 27, 1999, in San Francisco.

Rising Bank Risk?

1999 – 32

Fred Furlong and Simon Kwan | October 22, 1999

The banking industry is in its eighth year of strong earnings. As a result, banks have rebuilt their capital positions, and conditions in the industry appear to be quite good by historical standards. Against the backdrop of strong profits, it is useful to remember that banks, as financial intermediaries, are in the business of taking risk.

Living Wage Ordinances

1999 – 31

Rob Valletta | October 15, 1999

Living wage ordinances (LWOs) have been adopted by a number of local governments in recent years. Among the newest initiatives is the proposed law under consideration by the City and County of San Francisco.

Depreciations and Recessions

1999 – 30

Ramon Moreno | October 8, 1999

Following the dramatic currency depreciations in many East Asian economies in 1997, these countries suffered sharp and lingering recessions. This outcome runs counter to the notion that depreciations ought to boost output because they make domestically produced goods cheaper.

Dollarization in Argentina

1999 – 29

Mark M. Spiegel | September 24, 1999

Nations have long pursued exchange rate pegs to avoid wide fluctuations in the international values of their currency. As we have seen in recent crises in Asia and Latin America, however, when pegs are set at values that speculators deem unsustainable, they are attacked and usually break down during currency crises.

Early Warning Indicators of Banking Sector Distress

1999 – 28

Michael Hutchison | September 17, 1999

The financial crises in Japan and East Asia have been costly; they disrupted credit channels and curtailed economic activity not only in those countries but in other parts of the world as well. Such high costs make it desirable to have some form of early warning system of impending banking sector distress. If policymakers could identify the factors that lead to a higher likelihood of banking problems, they might be able to take steps to avert them.

Projecting Budget Surpluses

1999 – 27

Carl E. Walsh | September 10, 1999

After 15 years of federal budget deficits that overwhelmed every discussion of fiscal policy, the United States now faces the prospect of huge budget surpluses for the foreseeable future–that is, if recent projections by the Clinton administration and the Congressional Budget Office can be believed. But can they?

Who Has Benefited from California’s Recovery?

1999 – 26

Mary Daly and Heather Royer | September 3, 1999

The California economy is stronger than it has been in a number of years. Employment growth is solid, unemployment is low, and consumer confidence is rising.

A New View on Cost Savings in Bank Mergers

1999 – 25

Simon Kwan and James Wilcox | August 20, 1999

Over the past decade, the banking industry has undergone rapid consolidation. Before the 1990s, most bank mergers involved banks with less than $1 billion in assets; more recently, even the very largest banks have merged with other banks and with nonbank financial firms.

Hot and Cold Real Estate Markets in the San Francisco Bay Area

1999 – 24

John Krainer | August 6, 1999

The San Francisco Bay Area has had a “hot” real estate market for the past four years. The median single family house price in the Bay Area has appreciated by 30 percent to $330,000 since 1995.

The Basel Proposal for a New Capital Adequacy Framework

1999 – 23

Jose A. Lopez | July 30, 1999

In 1988, the Basel Committee on Banking Supervision, an international organization of bank supervisory agencies, adopted a capital adequacy framework for internationally active commercial banks based in the G-10 countries. However, after ten years, the limitations of that framework have become increasingly apparent.

Recent Research on Job Stability and Security

1999 – 22

Rob Valletta | July 23, 1999

In recent years an increasing number of observers have argued that changes in the operation of the U.S. labor market have led to rising job instability and job insecurity for American workers. The manifestations of this include an apparent rise in layoffs and a corresponding deterioration in workers’ attitudes about the prospects for staying in their current jobs.

Supply Shocks and the Conduct of Monetary Policy

1999 – 21

Bharat Trehan | July 2, 1999

The U.S. economy has performed remarkably well over the last few years. Real output has grown at a pace that is noticeably above average, while inflation has declined somewhat.

Understanding the Social Security Debate

1999 – 20

Mary Daly | June 25, 1999

A recent poll indicated that there is considerable confusion about the state and the fate of the Social Security system (NPR 1999). While most Americans are aware of Social Security’s impending financial crisis, confusion over the dimensions of the program’s problems appears to be undermining support for the measures required to resolve them.

Using CAMELS Ratings to Monitor Bank Conditions

1999 – 19

Jose A. Lopez | June 11, 1999

Bank supervisory agencies are responsible for monitoring the financial conditions of commercial banks and enforcing related legislation and regulatory policy. Although much of the information needed to do so can be gathered from regulatory reports, on-site examinations are needed to verify report accuracy and to gather further supervisory information.

Output and Inflation: A 100-Year Perspective

1999 – 18

Kevin J. Lansing and Jeffrey Thalhammer | May 28, 1999

While economists generally accept that monetary policy can influence nominal variables such as the price level and inflation, they continue to debate the relationship between monetary policy and real variables such as the unemployment rate and real GDP. During the early 1960s, many economists and policymakers believed that policy could exploit a stable trade-off between inflation and real economic activity.

Bank of Japan Purchases of Risky Assets: Lessons from Colonial America

1999 – 17

Mark M. Spiegel | May 21, 1999

In its recent efforts to assist Japan’s troubled banking sector, the central bank has purchased large amounts of assets other than Japanese government bonds, including private sector commercial paper. The holdings of the central bank, the Bank of Japan (BOJ), were not trivial.

Changes in the Business Cycle

1999 – 16

Carl E. Walsh | May 14, 1999

In December 1998, the current expansion reached a milestone – it became the longest peacetime expansion in post-World War II U.S. economic history, surpassing the record previously held by the 1982-1990 expansion. In fact, if the expansion continues through January 2000, it will tie the expansion associated with the Vietnam War as the longest expansion since our records of such things start in 1854.

Employment and Wages in California’s Financial Services Sector

1999 – 15

Rob Valletta | April 30, 1999

The U.S. financial services industry—especially banking—has undergone substantial technological change and industry restructuring during the 1990s. A variety of new techniques and services have been introduced in all areas of the financial services sector, and industry restructuring through mergers and consolidation has been a defining feature of the banking industry in recent years.

The Shrinking of Japanese Branch Business Lending in California

1999 – 14

Elizabeth Laderman | April 23, 1999

The sluggish economic conditions in Japan during most of the 1990s have taken a toll on the activities of Japanese banks’ California branches and agencies. Foreign branches and agencies are direct units of foreign banks and are not separately capitalized.

Monetary Policy and Monetary Institutions

1999 – 13

Glenn D. Rudebusch | April 16, 1999

This Economic Letter summarizes the papers presented at a conference on Monetary Policy and Monetary Institutions held on March 5-6, 1999, under the joint sponsorship of the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research.

Time for a Tobin Tax?

1999 – 12

Kenneth Kasa | April 9, 1999

On a typical day in the foreign exchange market roughly $1.5 trillion changes hands. This means that in less than a week foreign exchange transactions have exceeded the annual value of world trade.

Dealing with Currency Crises

1999 – 11

Ramon Moreno | April 2, 1999

The currency crises of the 1990s—the European Union’s in 1992, Mexico’s in 1994, East Asia’s in 1997, and Russia’s and Brazil’s more recently—raise concerns for a number of reasons. They are not only hard on the countries experiencing them, but if they spread widely they also may disrupt the international flow of credit, hindering trade, investment, and GDP growth in the world economy.

Monetary Policy and the Great Crash of 1929: A Bursting Bubble or Collapsing Fundamentals?

1999 – 10

Timothy Cogley | March 26, 1999

In recent years, a number of economists have expressed concern that the stock market is overvalued. Some have compared the situation with the 1920s, warning that the market may be headed for a similar collapse.

Economic Activity and Inflation

1999 – 09

Bharat Trehan | March 12, 1999

This Letter reviews four papers on the relationship between inflation and economic activity that were presented at a recent macroeconomics workshop organized by the Federal Reserve Bank of San Francisco and the Stanford Institute of Economic Policy Research. The papers focused on the Phillips curve, named for A.W. Phillips (1958); he showed that a plot of (wage) inflation against unemployment for the U.K. produced a downward-sloping curve, indicating that higher unemployment was accompanied by lower inflation.

How Did the Economy Surprise Us in 1998?

1999 – 08

Glenn D. Rudebusch | March 5, 1999

There is a one- to two-year delay between when the Federal Reserve changes monetary policy and the resulting effects on real output, unemployment, and inflation, so policymakers must be forward-looking and preemptive in order to effectively stabilize the economy and control inflation (Rudebusch 1995). Macroeconomic forecasts are thus a crucial element for the conduct of monetary policy, and good forecasts help ensure good policy.

How Frequently Should Banks Be Examined?

1999 – 07

Jose A. Lopez | February 26, 1999

Bank supervisory agencies, such as the Federal Reserve, need timely and reliable information about banks’ financial conditions in order to conduct effective supervision. On-site examinations of banks are an important source of such information: they not only permit supervisors to confirm the accuracy of regulatory reports that the banks themselves file, but they also allow supervisors to gather additional, confidential information on banks’ financial conditions.

Distribution and Employment Impacts of Raising the Minimum Wage

1999 – 06

Kenneth A. Couch | February 19, 1999

Since 1990, there have been four increases in the minimum wage under two modifications to the Fair Labor Standards Act. The first modification resulted in increases of 45 cents in 1990 and 1991, raising the federal minimum wage from $3.35 to $4.25.

A Better CPI

1999 – 05

Alison Wallace and Brian Motley | February 5, 1999

The monthly consumer price index (CPI) is the most oft-cited measure of inflation and one of the most important and closely watched statistics in the U.S. economy. It is an indicator of how well the Federal Reserve is doing in achieving and maintaining low inflation, and it also is used to determine cost-of-living adjustments for many government programs, collective bargaining contracts, and individual income tax brackets.

The Goals of U.S. Monetary Policy

1999 – 04

John Judd and Glenn D. Rudebusch | January 29, 1999

The Federal Reserve has seen its legislative mandate for monetary policy change several times since its founding in 1913, when macroeconomic policy as such was not clearly understood. The most recent revisions were in 1977 and 1978, and they require the Fed to promote both price stability and full employment.

Small Business Lending Patterns in California

1999 – 03

John Beauchamp and John Krainer | January 22, 1999

The recent trend of bank consolidation in California has once again focused attention on how regulators analyze the competitive effects of mergers. Traditionally, the Federal Reserve has defined banking markets to be local in scope.

East Asia’s Impact on Regional Growth in California

1999 – 02

Mary Daly | January 15, 1999

The East Asian economic slowdown has reduced employment growth throughout California, but some regions have been affected more than others. In the San Francisco Bay Area, strong trade ties to East Asia combined with a slowdown in the area’s prominent high-tech manufacturing sector have pushed employment growth below the state’s employment growth rate for the first time in three years.

U.S. Monetary Policy: An Introduction

1999 – 01

Economic Research staff | January 1, 1999

U.S. monetary policy affects all kinds of economic and financial decisions people make in this country–whether to get a loan to buy a new house or car or to start up a company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in bonds, or in the stock market, for example. Furthermore, because the U.S. is the largest economy in the world, its monetary policy also has significant economic and financial effects on other countries.

Describing Fed Behavior

1998 – 38

John Judd and Glenn D. Rudebusch | December 25, 1998

Describing the reasons for the policy actions of the Federal Reserve has long been a popular topic for economists, economic journalists, investors, and others. In particular, there is keen interest in what economists call the Fed’s implied “reaction function,” which models how the Fed sets monetary policy in response to conditions in the economy.

Can the Stock Market Save Social Security?

1998 – 37

Kevin Lansing | December 11, 1998

By now, most people are aware that some action by Congress will be needed to save Social Security from bankruptcy as the baby boom generation enters retirement. Official projections imply that the combined trust funds for Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) will be exhausted around the year 2030.

Slower Growth in California: the Role of Manufacturing

1998 – 36

Mary Daly | November 27, 1998

Over the past few years robust growth in manufacturing employment has helped California expand more rapidly than the nation. Recently, however, the financial crisis in East Asia and general imbalances in supply and demand in some high-tech sectors have combined to damp growth in the state’s manufacturing sector.

East Asia’s Impact on Twelfth District Exports

1998 – 35

Rob Valletta | November 20, 1998

This year, Japan’s economy is mired in recession, and the financial crisis that hit several smaller East Asian countries has deepened and spread throughout most of the region. Many analysts have predicted that these problems would exert restraining effects on economic growth in the U.S.

Contractionary Effects of Devaluation

1998 – 34

Kenneth Kasa | November 13, 1998

What is perhaps most surprising about recent events in Asia is not the widespread currency devaluations but the subsequent declines in economic activity. Many observers noted that the declining yen and China’s devaluation of the yuan had eroded the competitiveness of these countries.

Responding to Asia’s Crises

1998 – 33

Ramon Moreno | November 6, 1998

It is now more than a year since the financial crises broke out in East Asia. Yet the sharp currency depreciations associated with the crises have not spurred rapid growth in their dollar exports, which would underpin a rebound in economic activity in the region.

Risk and Return of Banks’ Section 20 Securities Affiliates

1998 – 32

Simon Kwan | October 23, 1998

In recent years, the push to allow greater affiliation among banks and other financial firms has intensified. Through regulatory measures, banking organizations have made inroads into both securities and insurance activities.

How Fast Is Modern Economic Growth?

1998 – 31

J. Bradford DeLong | October 16, 1998

The pace of productivity growth since the end of the Civil War has averaged about 1.6% per year–or so historical estimates (Kendrick 1961) and the official statistics of the Department of Commerce say. This average annual growth rate implies that output per worker doubles every 44 years, and that in the 133 years since the Civil War, productivity has doubled three times.

Mortgage Interest Rates, Valuation, and Prepayment Risk

1998 – 30

Joe Mattey | October 9, 1998

Mortgage interest rates dropped in early 1998 to nearly the lowest level in several decades. As mortgage rates moved down, refinancing activity surged, flooding some mortgage investors with funds for reinvestment at a time when a broader array of fixed-income investments also were offering lower yields.

Income Inequality and Mortality Risk in the United States: Is There a Link?

1998 – 29

Mary Daly and Greg Duncan | October 2, 1998

Rapid growth in income inequality in the United States over the past 20 years has raised numerous concerns among policymakers. One of the more disturbing is the possible link between income inequality and mortality.

The Natural Rate, NAIRU, and Monetary Policy

1998 – 28

Carl E. Walsh | September 18, 1998

The natural rate of unemployment is a key concept in modern macroeconomics. Its use originated with Milton Friedman’s 1968 Presidential Address to the American Economic Association in which he argued that there is no long-run trade-off between inflation and unemployment: As the economy adjusts to any average rate of inflation, unemployment returns to its “natural” rate.

Cities and Growth

1998 – 27

Kelly Ragan and Bharat Trehan | September 11, 1998

The study of economic growth is an important part of economics. Traditionally, economists have attempted to understand the process of growth at the level of the aggregate economy, focusing, for example, on concepts such as the economy-wide levels of saving or of education.

Could Russia Have Learned from China?

1998 – 26

Kenneth Kasa | September 4, 1998

Just as October is the month for stock market crashes, it seems July must be the month for currency crises. Last year, of course, witnessed the collapse of several Southeast Asian currencies, with a fallout that is still being felt.

How Do Currency Crises Spread?

1998 – 25

Reuven Glick and Andrew Rose | August 28, 1998

The world has experienced three waves of speculative attacks on fixed exchange rate regimes recently: the European Monetary System (EMS) crisis of 1992-93, the Mexican meltdown and “Tequila Hangover” of 1994-95, and the “Asian Flu” of 1997-98. These currency crises generally involved countries in the same region. Why?

What Caused East Asia’s Financial Crisis?

1998 – 24

Ramon Moreno | August 7, 1998

The collapse of the Thai baht in July 1997 was followed by an unprecedented financial crisis in East Asia, from which these economies are still struggling to recover. A great deal of effort has been devoted to trying to understand its causes.

New View of Bank Consolidation

1998 – 23

Fred Furlong | July 24, 1998

Consolidation has dramatically altered the structure of banking in the U.S. Since the mid-1980s, the number of banks has plummeted, and larger banks spanning ever wider geographic areas have become more prevalent.

Capital Flows and Exchange Rates in the Pacific Basin

1998 – 22

Reuven Glick | July 17, 1998

The greater integration of emerging market countries with international capital markets has brought problems as well as benefits for recipients. On the one hand, access to foreign funds has helped finance economic development.

The Separation of Banking and Commerce

1998 – 21

John Krainer | July 3, 1998

On May 13, the House of Representatives passed H.R.10 and took the nation one step further towards financial service reform. If passed by the Senate and signed by the President, this bill would dismantle part of the Depression-era Glass-Steagall Act by bringing down the barriers preventing unions between banks, securities firms, and insurance firms.

The Baby Boom, the Baby Bust, and Asset Markets

1998 – 20

Timothy Cogley and Heather Royer | June 26, 1998

In about 10 to 15 years, the first wave of post-war baby boomers will begin to retire, and we will start to see a large generational shift from young to old. This generational shift is illustrated in Figure 1, which shows the expected path of the so-called “old-age dependency ratio,” which is defined as the number of people aged 65 and older divided by the working population (those aged 20 to 64).

Does the Stock Market Prefer Republican Administrations?

1998 – 19

James Booth and Lena Chua Booth | June 19, 1998

There’s an old adage that a Republican in the White House means higher stock market returns. This adage derives from the generally held view that policies promoted by Republicans are more favorable to stock markets and capital formation.

U.S. Inflation Targeting: Pro and Con

1998 – 18

Glenn D. Rudebusch and Carl E. Walsh | May 29, 1998

In recent years, monetary economists and central bankers have expressed growing interest in inflation targeting as a framework for implementing monetary policy. Explicit inflation targeting has been adopted by a number of central banks around the world, including those in Australia, Canada, Finland, Israel, New Zealand, Spain, Sweden, and the U.K.

Central Bank Inflation Targeting

1998 – 17

Glenn D. Rudebusch and Carl E. Walsh | May 22, 1998

The five conference papers (listed at the end) were centered around measuring or evaluating the degree to which inflation should be the focus of the operating framework used to implement monetary policy. Explicit inflation targeting has been adopted by a number of central banks around the world.

Reasons for Public Support of Research and Development

1998 – 16

Joe Mattey | May 15, 1998

Federal funding for research and development has ebbed and flowed since the end of World War II (Figure 1). During the 1950s it generally averaged less than ½% of U.S. GDP; in the early 1960s–during the “space race” with the Soviets–it picked up sharply to more than 2% of GDP; and since the mid-1960s, it generally has grown less quickly than the overall economy, drifting back down to less than 1% of GDP currently.

Financial Services in the New Century

1998 – 15

Robert T. Parry | May 8, 1998

T. S. Eliot wrote “April is the cruelest month.” But April 1998 stands out–at least to people interested in the financial services industry–as a month of stunning changes. At the beginning of April, Citigroup was a word few people had ever heard of, and BankAmerica’s headquarters seemed like a permanent fixture in San Francisco.

The Shadow of the Great Depression and the Inflation of the 1970s

1998 – 14

J. Bradford DeLong | May 1, 1998

The inflation of the 1970s was a time when uncertainty about prices made every business decision a speculation on monetary policy. During that decade, the annual U.S. inflation rate rose in the 5-10% range, compared to a 0-3% range typical of peacetime America.

Bank Charters vs. Thrift Charters

1998 – 13

Simon Kwan | April 24, 1998

One of the key issues in Congress’s current debates about modernizing the financial services industry is whether to eliminate the charter for thrifts (savings and loans). The savings and loan associations originally were created with a special mandate to channel funds to the housing industry.

Health Insurance and the U.S. Labor Market

1998 – 12

Tom Buchmueller and Rob Valletta | April 17, 1998

Health insurance in the United States largely is employment-based: nearly 90% of Americans with private insurance are covered through employer-provided plans. Furthermore, health insurance is the largest nonwage component of total compensation, accounting for 34% of expenditures on voluntary employee benefits and 7% of total compensation (U.S. BLS 1994).

Long-run Determinants of East Asian Real Exchange Rates

1998 – 11

Menzie Chenn | April 10, 1998

Since the summer of 1997, when many East Asian currencies began to fall, a good deal of attention has been paid to the causes and consequences of exchange rate movements. This Economic Letter sheds some light on these issues by summarizing recent research into the long-run determinants of real exchange rates in East Asia (Chinn 1997).

East Asia’s Effect on the Twelfth District

1998 – 10

Mary Daly | March 27, 1998

Since July 2, 1997, when the fall of the Thai baht against the U.S. dollar rang the first alarm about problems in East Asia, numerous economists have forecast the effect of those developments on growth in the United States. Current consensus estimates suggest that the Asian turmoil likely will reduce real GDP growth in the nation by ½ to 1 percentage point in 1998.

A Currency Board for Indonesia?

1998 – 09

Mark M. Spiegel | March 20, 1998

In response to recent sharp devaluations in its currency, the Indonesian government recently raised the possibility of adopting a currency board. A standard currency board is a fixed exchange rate regime whose currency is fully backed by foreign reserves; that is, the government pledges to redeem its domestic currency for a foreign “hard currency” (in Indonesia’s case, United States dollars) at a fixed rate, and the full backing of outstanding currency implies that the government has the ability to fulfill this pledge.

On the Transition to a Fully Funded Social Security System

1998 – 08

Timothy Cogley | March 13, 1998

While the President and Congress are celebrating (and rightly so) their progress in reducing the budget deficit, everyone involved is well aware that the long-term prognosis for the federal budget remains disturbing. One of the main threats to long-term budget balance comes from Social Security, which promises future retirees much more in benefits than it expects to collect in taxes.

Is It Time to Look at M2 Again?

1998 – 07

Kelly Ragan and Bharat Trehan | March 6, 1998

In July 1993, Chairman Greenspan informed Congress that the monetary aggregate, M2, had been “downgraded as a reliable indicator of financial conditions in the economy, ” reflecting the fact that “the historical relationships between money and income and between money and the price level [had] largely broken down.” More recently, however, there have been signs that M2 has resumed a more “normal” relationship with key macroeconomic variables.

Prospects for the U.S. and California Economies

1998 – 06

Robert T. Parry | February 27, 1998

As the year begins, the overall economic picture looks pretty good. Both the national and state economies are in the midst of strong, sustained expansions, and inflation remains remarkably well-behaved. But there are some areas of uncertainty to consider as we look ahead – not the least of which is the financial crisis in East Asia.

The 1997 Nobel Prize in Economics

1998 – 05

John Krainer | February 13, 1998

The 1997 Nobel Prize in economics was awarded to Robert C. Merton and Myron S. Scholes. Merton and Scholes and the late Fischer Black are widely credited with developing the tools necessary to price options. This achievement not only has opened new doors for academic research, but also has been widely embraced by practitioners in the financial industry.

The New Output-Inflation Trade-off

1998 – 04

Carl E. Walsh | February 6, 1998

One of the hallmarks of economic analysis is the recognition that choice involves trade-offs. Whether it’s a consumer deciding if the roominess of a sports utility vehicle is worth the lower gas mileage, or a firm deciding whether lower wages of an overseas production facility compensate for the lower worker productivity, or Congress deciding whether a new expenditure program justifies the higher taxes needed to finance it, trade-offs must be faced.

The Budget Deficit

1998 – 03

J. Bradford DeLong | January 30, 1998

The 1997 accounting year of the federal government ended last September 30, recording a budget deficit of $22 billion–not quite 0.3% of national product. President Clinton will submit a balanced budget for fiscal 1999. For all intents and purposes, the budget is in balance.

Trends in Twelfth District Banking in 1997

1998 – 02

Elizabeth Laderman and Jennifer Martinez | January 23, 1998

Trends shaping the banking industry over the past several years continued in full force in the 12th District in 1997. These include changes in market structure, continued alteration of the mix of products and services that banks offer, and innovations in delivery channels.

Export Competition and Contagious Currency Crises

1998 – 01

Chan Huh and Kenneth Kasa | January 16, 1998

On July 2, 1997, the Thai baht fell 17% against the U.S. dollar, ending a 13-year period in which the baht closely shadowed the U.S. currency. The devaluation was not entirely a surprise. In fact, it followed months of repeated speculative attacks, during which the Bank of Thailand spent billions of dollars defending its currency.

Explaining Trading Volume in Foreign Exchange: Lessons from Tokyo

1997 – 38

Richard Lyons | December 26, 1997

The enormous volume of trading in foreign exchange (FX) markets–almost 100 times the volume on the New York Stock Exchange–has been a puzzle. Economists have turned to a variety of approaches to solve the puzzle–the goods market approach, the asset market approach, and the microstructure approach.

Financial Crises and Bank Supervision: New Directions for Japan?

1997 – 37

Michael Hutchison | December 13, 1997

The economies of East Asia have been buffeted in recent months by bouts of speculative currency attacks, stock and real estate price declines, and banking problems. Media attention has focused on Thailand, Indonesia, Korea, Malaysia, and, most recently, Hong Kong.

British Central Bank Independence and Inflation Expectations

1997 – 36

Mark M. Spiegel | November 28, 1997

On May 6, 1997, the new Chancellor of the Exchequer of Great Britain, Gordon Brown, announced a policy change that he described as “… the most radical internal reform to the Bank of England since it was established in 1694.” The reform granted the Bank of England independence from the government in the conduct of its interest rate policy.

NAIRU: Is It Useful for Monetary Policy?

1997 – 35

John Judd | November 21, 1997

In recent years, a debate has re-emerged about whether the Federal Reserve should pay attention to the “NAIRU” in conducting monetary policy. NAIRU is an acronym for “non-accelerating-inflation rate of unemployment” (a closely related concept is the “natural rate of unemployment”).

Job Security Update

1997 – 34

Rob Valletta and Randy O'Toole | November 14, 1997

Since early 1996, the U.S. economy has produced a combination of very low unemployment and stable or declining inflation. Many analysts and pundits regard this performance as surprising, because similar sustained low unemployment rates have been associated in the past with rising inflation.

Lessons from Thailand

1997 – 33

Ramon Moreno | November 7, 1997

After more than a decade of maintaining the Thai baht’s near-peg to the U.S. dollar, Thai authorities abandoned the peg on July 2, 1997. By October 24, market forces led the baht to depreciate by 60% against the U.S. dollar.

The October ’87 Crash Ten Years Later

1997 – 32

Robert T. Parry | October 31, 1997

This Economic Letter is adapted from remarks delivered by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, at a conference sponsored by the Graduate School of Management at the University of California, Davis, on October 17, 1997, entitled “The October ’87 Crash: What Have We Learned about the Causes and Consequences of Large Market Movements?”

Federal Subsidies in Banking: The Link to Financial Modernization

1997 – 31

Fred Furlong | October 24, 1997

Concern over extending the federal safety net is a perennial issue in legislative measures to allow greater integration of banking and other financial services. And, it remains central to the testimony on financial modernization in the current session of Congress.

Assessing the Benefits of Economic Growth

1997 – 30

Mary Daly | October 17, 1997

On September 29, 1997, the U.S. Census Bureau released its annual report on family income and poverty in the United States. The report showed that, by official calculations, economic growth is finally benefitting a majority of Americans.

A New Paradigm?

1997 – 29

Bharat Trehan | October 10, 1997

The economy has been performing extraordinarily well recently. Output has grown at a robust rate, and inflation and the unemployment rate are down to levels not seen in several decades.

Get Ready for Japanese Trade Deficits

1997 – 28

Kenneth Kasa | October 3, 1997

From 1896 to 1970 the United States had a continuous string of surpluses in its balance of trade (in goods and services). Since the late 1970s it has had a continuous string of deficits.

What is the Optimal Rate of Inflation?

1997 – 27

Timothy Cogley | September 19, 1997

Central banks are now placing greater emphasis on maintaining low inflation, and this raises the question: How low should inflation be? Some say that the current level of inflation is acceptable, while others argue that inflation should be pushed toward zero.

The Old Lady of Threadneedle Street Gets Her Independence

1997 – 26

Carl E. Walsh | September 12, 1997

The Bank of England, established in 1694, is one of the world’s oldest central banks. It is affectionately known as the “Old Lady of Threadneedle Street,” having operated continuously at that location in the City of London since 1734.

Rising Wage Inequality in the U.S.

1997 – 25

Rob Valletta | September 5, 1997

Rising inequality in wages has been a key feature of the U.S. labor market since the late 1970s. Put simply, rising wage inequality implies that gaps between high-wage and low-wage workers have widened.

Labor Market Effects of Welfare Reform

1997 – 24

Mary Daly | August 29, 1997

On August 22, 1996, President Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act into law and ended the sixty-two year old federal entitlement system for the needy commonly referred to as welfare. Since then, welfare caseloads in the U.S. have fallen by 12 percent (see Figure 1).

Fiscal Constraints in the EMU

1997 – 23

Mark M. Spiegel | August 15, 1997

The current plan for a common currency in the European Monetary Union (EMU) includes a set of rules governing member countries’ government finances, known as the Growth and Stability Pact. This Pact, which was ratified in the June 1997 Amsterdam Summit, commits EMU members to government budget positions which are close to balance and specifies explicit sanctions for persistent excessive government deficits.

Banking System Developments in the Four Asian Tigers

1997 – 22

Chan Huh | August 8, 1997

Over the past 30 years, Hong Kong, Korea, Singapore, and Taiwan have had remarkably rapid and sustained economic growth, earning the nickname the four tigers. Because of the new investment opportunities they provide and because their experiences may offer lessons for less developed economies, they have attracted considerable attention from the financial and policy communities, as well as from economists who have renewed interest in research in theories of economic growth.

Recent Developments in Loan Loss Provisioning at U.S. Commercial Banks

1997 – 21

Simon Kwan and Randy O’Toole | July 25, 1997

U.S. commercial banks have posted record profits during the past few years, with return on equity for all banks hovering around 15% and return on assets well above 1% since 1993. As a result, bank holding company stocks have been doing even better than the rest of the market, which itself has recorded sizable gains during this period.

Government Intervention and The East Asian Miracle

1997 – 20

Reuven Glick and Ramon Moreno | July 11, 1997

In recent years, the increasingly prosperous East Asian economies of Japan, Hong Kong, Singapore, Korea, and Taiwan have been hailed as models of achievement for other emerging economies. While a number of explanations may be offered for East Asia’s economic success, many observers are convinced that an outward-looking development strategy, particularly a dynamic export sector, has been a crucial ingredient.

Deposits and Demographics?

1997 – 19

Elizabeth Laderman | June 27, 1997

Since 1978, the share of households’ financial assets held in depository institutions has declined steadily from about 39% to about 17%. Previous research suggests that an important contributing factor may be the shifting age structure of the population.

Interest Rates and Monetary Policy

1997 – 18

Glenn D. Rudebusch | June 13, 1997

In the postwar period, the ultimate objectives of the Federal Reserve–namely full employment and stable prices–have remained unchanged; however, the Fed has modified its operational and intermediate objectives for monetary policy several times in response to changes in the economic environment. For example, in 1970, the Federal Reserve formally adopted monetary targets in an attempt to use an intermediate nominal objective or anchor to resist slowly rising inflation.

Dynamic Measures of Competitiveness: Are the Geese Still Flying in Formation?

1997 – 17

Andrew Rose | May 30, 1997

Now and then, economists actually manage to come up with colorful phrases to describe economic phenomena. This Economic Letter focuses on the phenomenon known as “the flying geese formation.”

Bias in the CPI: "Roughly Right or Precisely Wrong"

1997 – 16

Brian Motley | May 23, 1997

Many economists argue that our most closely watched indicator of inflation, the consumer price index (CPI), is biased and overstates inflation. In December 1996, a group of economists appointed by the Senate Finance Committee reported on a study of the CPI and estimated that the index overstates annual inflation by about 1.1 percentage points (Boskin, et al. 1996); so, instead of the official 2.8% rate of inflation in 1996, it might have been 1.7%.

Does Singapore Invest Too Much?

1997 – 15

Kenneth Kasa | May 15, 1997

During the past 30 years, the economies of several East Asian nations grew on average by about 8% per year. Such rapid growth over such a long period of time is historically unprecedented.

Proposals for Reforming Social Security

1997 – 14

Timothy Cogley and Heather Royer | May 9, 1997

In early January, the Advisory Council on Social Security published a review of the system and reported that it is in jeopardy. Although the system is currently accumulating a surplus, actuaries at the Social Security Administration forecast that the present value of future obligations far exceeds the present value of future revenues.

Job Creation and Destruction

1997 – 13

Prakash Loungani and Bharat Trehan | May 2, 1997

National labor market conditions are a central concern for both economists and policymakers. Traditionally, macroeconomists have not paid attention to patterns of job creation and job destruction but have tried to understand the labor market in terms of the behavior of economy-wide aggregates, such as interest rates or aggregate wage levels.

Getting the Jump on Interstate Branching

1997 – 12

Fred Furlong | April 25, 1997

Although the federal trigger date for allowing interstate branching is June 1, 1997, about half the states, including eight of the nine in the Twelfth District, already have gotten a jump on interstate branching. These states took advantage of a provision in the federal law that allows states to opt in early, so that banking organizations can operate interstate through branches of a single bank, and not just through separately chartered banks.

Should Monetary Policy Focus on "Core" Inflation?

1997 – 11

Brian Motley | April 18, 1997

The Consumer Price Index, our most common measure of consumer inflation, has been the subject of controversy recently. Most of the headlines reflect the debate about whether the CPI overstates inflation, but there are other disagreements about this measure as well, especially in the context of monetary policymaking.

Dealing with Currency Speculation in the Asian Pacific Basin

1997 – 10

Ramon Moreno | April 11, 1997

In recent years, policymakers in the Asian Pacific Basin have paid increasing attention to the possibility of the sudden depreciation of their currencies, in sharp contrast to their traditional concern with currency appreciation. This attention is a response to a number of developments, most notably: speculation against the currencies of Hong Kong, the Philippines, and Thailand in the wake of the Mexican peso crash of December 1994; uncertainty on the part of some observers about the maintenance of the peg of the Hong Kong dollar to the U.S. dollar after the July 1997 transfer of sovereignty to China; and concerns voiced in the financial press about the sustainability of relatively large current account deficits in some Southeast Asian economies.

The Costs of Managing Speculative Capital Inflows in the Pacific Basin

1997 – 09

Kenneth Kletzer | March 28, 1997

In recent years, many middle-income developing countries have experienced impressively large inflows of financial capital. The net capital inflow to developing Pacific Basin countries between 1990 and 1993 alone totaled $151 billion.

Cracking the Glass-Steagall Barriers

1997 – 08

Simon Kwan | March 21, 1997

Since 1933, the Glass-Steagall Act has stood as a wall between commercial banking and investment banking in the U.S. financial system. But the wall is not perfectly solid.

The "Shrinking" Middle Class?

1997 – 07

Mary Daly | March 7, 1997

A vibrant middle class is often cited among the benefits of our competitive economic system. It is argued that a large and growing middle class is an antidote to poverty, an incentive for individuals to work and improve their economic position, and an answer to those who worry that the disparity between the top and bottom of the income distribution in the U.S. is too large.

Efficiency of U.S. Banking Firms – An Overview

1997 – 06

Simon Kwan | February 28, 1997

Bank managers, policymakers, and bank investors all are concerned with how efficiently a bank uses its labor and capital inputs to produce the cluster of financial products. Is a bank using the right level and mix of inputs?

Job Loss during the 1990s

1997 – 05

Rob Valletta | February 21, 1997

Although the U.S. economy is well into a sixth year of solid expansion and national unemployment remains at low levels, concerns about corporate downsizing, job displacement, and job security continue to affect the national mood. These concerns were highlighted early in the recent presidential election campaign.

Inflation Targeting

1997 – 04

Chan Huh | February 7, 1997

Beginning in the early 1990s, price stability became an increasingly important goal of the monetary authorities in many countries. But some central banks found the traditional approaches–namely, influencing inflation and economic activity by controlling intermediate variables like monetary aggregates or an exchange rate–not very successful.

Inequality in the United States

1997 – 03

Brian Motley | January 31, 1997

In recent months, there has been much public discussion of the continuing increase in income inequality in the U.S. (Weinberg 1996). Some commentators suggest that the rich are getting richer, the poor are getting poorer, and those in the middle are getting nowhere.

Changes in Small Business Lending in the West

1997 – 02

Mark Levonian | January 24, 1997

Over the past year, big banks have made a highly visible push into small business lending. Several large banks have been using new technology to reduce the cost of originating small business loans and speed the approval process.

Nobel Views on Inflation and Unemployment

1997 – 01

Carl E. Walsh | January 10, 1997

Is current monetary policy consistent with maintaining a low rate of inflation? Would the establishment of price stability as the Fed’s sole objective hinder long-run growth prospects for the U.S. economy?

The Slowing Exodus from California

1996 – 38

Stuart Gabriel and Joe Mattey | December 27, 1996

California residents flocked to other U.S. states during California’s long, deep economic downturn of the early 1990s. The departure of large numbers of Californians contrasted starkly with the longstanding norm of sizable net in-flows of population to the Golden State. Substantial numbers of foreign and domestic migrants made their way to California during the first four decades of the post-WWII period.

Effects of Welfare Reform on Western States

1996 – 37

Mary Daly and Joe Mattey | December 20, 1996

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 provides a new framework for welfare in the United States. The act ends the 61-year federal entitlement to public assistance for needy individuals and further shifts control over public assistance distribution and benefit levels from the federal to the state governments.

Why Do Stock Prices Sometimes Fall in Response to Good Economic News?

1996 – 36

Timothy Cogley | December 13, 1996

On a number of occasions this year, the Labor Department has released reports showing that employment was growing more rapidly than analysts had anticipated. For example, the economy added roughly 800,000 jobs in February and another 239,000 jobs in June.

Post-1997 Hong Kong: A View from the Financial Markets

1996 – 35

Kenneth Kasa | November 29, 1996

Hong Kong is one of the great success stories of economic development. In less than fifty years Hong Kong has transformed itself from a sleepy trading village to one of the wealthiest and most dynamic cities in the world.

Capacity Utilization and Structural Change

1996 – 34

Joe Mattey | November 15, 1996

The Federal Reserve Board’s measures of capacity utilization for the U.S. manufacturing sector have been a useful indicator of inflationary pressures. However, some observers have claimed that the relationship between capacity utilization and inflation has broken down recently, owing to increased international trade, a shift in the share of the nation’s workforce in service-producing industries, and rapid technological change.

Pacific Basin Notes: Trade Liberalization in the Pacific Basin

1996 – 33

Ramon Moreno | November 8, 1996

This November, the 18 members of the Asia Pacific Economic Cooperation Forum (APEC)–which includes the U.S.–will hold a summit in Subic Bay, the Philippines, to approve individual and collective plans to liberalize trade and investment. APEC is but one of several organizations focused on trade issues in the Pacific Basin.

Why Is the Philippines Repurchasing Its Brady Bonds?

1996 – 32

Mark M. Spiegel | November 1, 1996

In September, the Philippines announced it would issue $1.9 billion in Eurobonds to finance a repurchase of outstanding Philippine “Brady bonds,” the securities acquired by banks in the Philippines debt restructuring under the Brady Plan in 1992. The Brady Plan was a program of debt reduction partially financed by official institutions to allow highly indebted countries to repurchase debt at a discount.

The California "Rate Gap" since the BankAmerica-Security Pacific Merger

1996 – 31

Elizabeth Laderman | October 25, 1996

Well before the merger of BankAmerica Corporation and Security Pacific Corporation in 1992, California had a “rate gap”–that is, interest rates on small denomination (retail) deposits tended to be lower at California banks than at banks nationwide. According to economic theory, an increase in banking market concentration due to, say, a large bank merger, may decrease deposit interest rates.

Will the yen replace the dollar?

1996 – 30

Ramon Moreno | October 18, 1996

As awareness of Japan’s importance in the world economy has increased in recent years, interest in whether the dollar is likely to retain its pre-eminent role in world markets also has grown. Some observers have speculated that the yen is likely to be used more widely in international transactions, perhaps to the point of assuming some of the U.S. dollar’s role as a key international currency.

The Minimum Wage

1996 – 29

Rob Valletta | October 11, 1996

August 20, 1996, President Clinton signed a bill passed by Congress that raises the federal hourly minimum wage from $4.25 to $5.15; this is scheduled to occur through increases of 50 in October 1996 and 40 in September 1997. Leading up to this increase has been a heated debate within the economics profession over the past several years regarding the employment and other economic effects of the minimum wage.

Is Opportunistic Monetary Policy Credible?

1996 – 28

Glenn D. Rudebusch | October 4, 1996

Monetary policy actions are widely considered to be better implemented and more effective when they are credible–that is, when the goals and strategies of the central bank have been clearly and believably communicated to the public. Thus, credibility is highly valued by central banks. Indeed, among some central banks, credibility is almost a mantra of policy.

Banks and Foreign Exchange Exposure

1996 – 27

Helen Popper | September 20, 1996

Have the big U.S. bank holding companies exposed themselves to excessive foreign exchange risk? Has their use of foreign exchange contracts contributed to their exposure? And what about the big Japanese banks — are they similarly exposed? In the wake of new international agreements to regulate the banks’ risks, these questions have become increasingly important.

Evolution of the Quality of Life in the U.S.

1996 – 26

Joe Mattey | September 13, 1996

Quality of life increasingly is identified as important to the economic well-being of a state or area. Quality of life is a catchall concept, covering a myriad of local amenities, such as air quality, traffic congestion, crime, tax burdens, public school quality, and the quality of other government services.

Accountability in Practice: Recent Monetary Policy in New Zealand

1996 – 25

Carl E. Walsh | September 9, 1996

Two recent news stories offered examples of dramatically contrasting relationships between a government and the authority charged with monetary policy. In Russia, President Boris Yeltsin pressured the Central Bank of Russia into providing $1 billion for new government spending, even though officials of the central bank protested that Yeltsin’s demands were a threat to the bank’s independence.

Collective Action Difficulties in Foreign Lending: Banks and Bonds

1996 – 24

Mark M. Spiegel | August 23, 1996

One of the major barriers to resolving the Latin American debt crisis of the 1980s was the “collective action” difficulties among creditors–that is, the difficulty of getting the lenders to take actions that would benefit them as members of the group but that might not be in their individual interest. In the case of sovereign lending, for example, where enforceable legal mechanisms are absent, collective action difficulties arise for two reasons.

New Measures of Japanese Monetary Policy

1996 – 23

Kenneth Kasa and Helen Popper | August 9, 1996

In September of 1995 the Bank of Japan (BOJ) reduced its discount rate to 0.5 percent, a post-war low not only for Japan, but for the entire OECD. The usual interpretation of interest rate movements would imply that the BOJ has been engaged in an aggressively expansionary monetary policy, as lower interest rates tend to stimulate demand.

Rising Economic Tide

1996 – 22

Fred Furlong | July 26, 1996

A rising tide raises all ships. That is good news for community banks in California, where the economic tide continues to flow in after the pronounced ebb of the past recession.

What’s Behind Problem Credit Card Loans?

1996 – 21

Elizabeth Laderman | July 19, 1996

During 1995, the credit card charge-off ratio at banks rose sharply, almost a full percentage point. This surprised some observers, since 1995 was the fourth year of economic expansion in the U.S.

On the Relation between Stocks and Bonds – Part II

1996 – 20

Simon Kwan | July 5, 1996

The previous issue of the Economic Letter discussed the relationship between the movements in the stock and bond market, at the macroeconomic level. How stock and bond prices move relative to each other is important because it directly affects the risk of a portfolio that contains both kinds of long-term assets.

On the Relation between Stocks and Bonds – Part I

1996 – 19

Simon Kwan | June 28, 1996

Stocks and bonds have very different risk-return characteristics. In general, while stocks are more volatile than bonds, over the long run, stocks are expected to yield higher returns than bonds.

Development of Financial Services in the Asia Pacific: Issues and Opportunities

1996 – 18

Robert T. Parry | June 7, 1996

This Economic Letter is adapted from a speech given by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, to the 31st Conference of the Governors of Southeast Asian Central Banks in Singapore on May 8, 1996.

Recent Developments in Labor Force Participation

1996 – 17

Brian Motley | May 24, 1996

Last week’s Economic Letter (96-16) explored the controversy surrounding the recent estimates of the U.S.’s potential growth rate. It focused particularly on the fact that a slowing in the labor force participation rate is probably the main reason for the slowing in the potential growth rate in the 1990s.

Economic Growth and Monetary Policy

1996 – 16

Robert T. Parry | May 17, 1996

A controversy about the national economy has been in the headlines recently. For example, in the Christian Science Monitor, one headline was “What’s the Economic Speed Limit?” As if in answer, the New York Times featured an article entitled “It’s a Slow-Growth Economy.”

Global Payments in the 21st Century: A Central Banker’s View

1996 – 15

Robert T. Parry | May 3, 1996

This Economic Letter is adapted from a speech delivered by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco, to the annual meeting of the National Automated Clearing House Association in San Francisco on April 17, 1996.

Record 1995 for Western Banks

1996 – 14

Gary Zimmerman and Deanna Brock | April 26, 1996

Economic conditions in most of the District were healthy in 1995, and that helped District banks generate record profits. Employment growth expanded even more rapidly in the District than in the nation; in fact, of the nine District states, five–Nevada, Utah, Oregon, Arizona, and Idaho–ranked in the top ten for nonagricultural employment growth.

Models of Currency Speculation: Implications and East Asian Evidence

1996 – 13

Ramon Moreno | April 19, 1996

In recent years, there has been growing interest in the causes of speculative pressures on currencies, stimulated by the attack on the exchange rate mechanism of the European Monetary System in September 1992 and more recently by the devaluation and float of the Mexican peso in December 1994. In a number of Asian economies, interest in speculative pressures has recently been heightened by concern about the possible reversal of the vast foreign capital inflows they have experienced in the last decade (see Glick and Moreno 1995).

Integrating Banking Markets in the EC

1996 – 12

Gary Zimmerman | April 5, 1996

The European Community (EC) implemented the framework for a single European market for retail banking services in 1993. The integrated market was expected to increase competition and financial integration in EC financial services, much as interstate banking and branching is expected to increase competition in many U.S. banking markets.

Monetary Policy: Measurement and Management

1996 – 11

| March 29, 1996

This Letter summarizes the papers and discussion at a conference that was held at the Federal Reserve Bank of San Francisco on March 1 under the joint sponsorship of the Bank and Stanford University’s Center for Economic Policy Research.

District Economic Developments

1996 – 10

| March 8, 1996

This Weekly Letter summarizes Twelfth District economic conditions as reported in the latest edition of the Federal Reserve Bank of San Francisco’s Western Economic Developments, which was authored by Robert Ingenito, Joe Mattey, and Rob Valletta.

Issues in the Inflation Outlook

1996 – 09

| March 1, 1996

This Weekly Letter is adapted from recent speeches given by Robert T. Parry, President and Chief Executive Officer of the Federal Reserve Bank of San Francisco.

Why Central Bank Independence Helps to Mitigate Inflationary Bias

1996 – 08

| February 23, 1996

The President and Congress are directly responsible for fiscal policy, but Congress has chosen (through the Federal Reserve Act) to delegate authority for monetary policy to the Federal Reserve System. Furthermore, it has granted the Federal Reserve a substantial degree of independence.

Has Job Security in the U.S. Declined?

1996 – 07

| February 16, 1996

Has Job Security in the U.S. Declined? Yes, according to public perception and a number of articles in newspapers and business magazines.

Are All Devaluations Alike?

1996 – 06

| February 9, 1996

Many countries in the world fix their exchange rate to that of another currency. In Africa, a number of countries have a currency in common the CFA Franc which they peg to the French franc; in Europe, the European Monetary System (EMS) links its members’ currencies to the German Deutschemark; and in Asia and Latin America, several countries peg their currencies unilaterally to the U.S. dollar.

New Evidence on State Economic Development Spending and Manufacturing Employment

1996 – 05

| February 2, 1996

One of the most important concerns of a state or local government is whether state policies will encourage or dampen growth in its manufacturing sector. A large amount of research has been done in an effort to determine what causes a locality’s manufacturing sector to grow.

California’s Community Banks in the 1990s

1996 – 04

| January 26, 1996

In 1995, California’s community banks (assets under $300 million) improved their earnings and asset quality, although their overall performance remained lackluster. The total problem loan ratio for the state’s 333 community banks still is above the pre-recession level, and their return on assets in 1995 was less than half that for all banks in the state and the nation.

What Do Wages Tell Us About Future Inflation?

1996 – 03

| January 19, 1996

The rate of wage growth has moderated recently, leading some observers to predict that inflation will continue to remain subdued in the near future. In this Letter we discuss what economic theory tells us about the relationship between changes in wages and changes in prices and also look at some of the empirical evidence on this issue, in order to determine whether the recent slowdown in wage growth does, in fact, tell us something about future inflation that we might otherwise miss.

Innovations and Recent Developments in Mortgage-Backed Securities

1996 – 01

| January 5, 1996

The securitization of mortgages has fundamentally changed home mortgage financing. In the past, the vast majority of home mortgages were originated and funded by depository institutions. Today about half of total home mortgage debt outstanding is held by a wide variety of financial institutions and investors in the form of mortgage-backed securities.