Dr. Econ

Dr. Econ answers many questions with a focus on monetary policy and Federal Reserve related issues. The Doctor does not do homework, give financial advice or provide research support.


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Recently the Federal Open Market Committee adopted numerical thresholds for the unemployment rate and inflation to communicate the likely future policy direction to the public. Do these apply to both large-scale asset purchases and federal funds rate? What are the benefits of this approach?

Posted May 1, 2013

Indeed, in December 2012, The Federal Open Market Committee (FOMC) announced numerical thresholds for the unemploym­­­ent rate and inflation that will guide future policy decisions about the federal funds rate.


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How did the contraction in bank lending that followed the 2008 financial crisis and recession compare with the decline in bank loans after the stock market crash in 1929 and the Great Depression of the 1930s?

Posted November 1, 2012

The decline in bank loans after their peak in the third quarter of 2008 was the largest contraction in percentage terms during the post-World War II period. Yet the decline during the Great Recession was not nearly as dramatic as the downturn that occurred during the Great Depression of the 1930s.


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What is neutral monetary policy?

Posted April 1, 2005

Dr. Econ discusses monetary policy, and how it is used to stimulate and restrain the economy. Also discussed is the effect of the fed funds rate on other interest rates.


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Does the Federal Reserve System hold stocks or other commonly traded equities like the Bank of Japan recently started doing?

Posted September 1, 2002

The Federal Reserve System does not hold corporate stocks, but it does hold government securities. In 2001 government securities accounted for a significant share of Federal Reserve System’s $654 billion in assets. The Federal Reserve’s securities portfolio is composed of securities issued by the United States government or government agencies.

I heard an investment analyst say that the Fed had increased the money supply, and that would lead to economic growth. What indicators would tell me about the money supply and Fed monetary policy?

Posted July 1, 2002

The Federal Reserve Board publishes information on a variety of interest rates and monetary aggregates that you might find useful. Let me recommend some sources for you to keep up to date on Fed policy actions, interest rate and money supply statistics, and other online publications.

What is the relationship between the discount rate and mortgage rates?

Posted June 1, 2002

The Discount Rate is the interest rate the Federal Reserve Banks charge depository institutions on overnight loans. The primary conventional mortgage rate is a market-determined interest rate for long-term residential mortgage loans. How do these two interest rates behave over time?

What are business cycles and how do they affect the economy?

Posted May 1, 2002

Business cycles are the “ups and downs” in economic activity, defined in terms of periods of expansion or recession. During expansions, the economy, measured by indicators like jobs, production, and sales, is growing–in real terms, after excluding the effects of inflation. Recessions are periods when the economy is shrinking or contracting.

How does the U.S. banking system compare with foreign banking systems?

Posted April 1, 2002

This answer illustrates some ways in which the U.S. banking system is similar (providing banking and financial services) to the banking systems in other industrialized countries and other ways (banking regulation, structure of the industry, powers of banks to engage in securities and insurance activities) in which it differs from them.


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What is the economic function of a bank?

Posted July 1, 2001

Discusses the role of banks as key components of the financial system and how bank assets and liabilities help channel funds from savers toborrowers in a more efficient manner.


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What would be the likely effect of completely paying off the public debt?

Posted August 1, 2000

Describes some of the changes that would result from payingoff national debt for key figures, such as the Federal Reserve, the financial markets and institutions, and for other holders of government debt. Also presents some key financial statistics, such as changes that would result in Treasury securities and gross public debt.

Should the government or the central bank be left in control of interest rates?

Posted February 1, 2000

Referencing the history of monetary policy, (i.e. the Treasury Accord),this discussion focuses on why independent central banks, such as the Federal Reserve are more successful at reaching price stability through inflation and interest rate control than central banks acting under the direction of the treasury or the government.


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Why do investment banks syndicate a new securities issue (and related questions)?

Posted December 1, 1999

The first part of this three-part Dr. Econ discusses why investmentbanks establish a syndicate in new securities offerings. The secondand third sections address the implications of the Employee Retirement Income Security Act of 1974 (ERISA) and the role of insurance companiesas major bondholders in the financial markets.

Why does a trade deficit weaken the currency?

Posted October 1, 1999

Discusses the implications of an imbalance between imports& exports including changes to the foreign exchange rate, currency devaluation, and dollar depreciation

Why does the discount rate no longer vary by region?

Posted January 1, 1999

In the 1910s, the discount rate variance among the regional banks was large because capital did not flow as easily fromone region to another. Today, however, the single national discount rate among Fed Districts reflects a unity in national credit markets.


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How would Russian use of the dollar as a medium of exchange along with the ruble affect U.S. monetary policy?

Posted November 1, 1998

The proposal to go to a dollar-based economy in order to alleviate the Russian currency crisis would not greatly impact U.S. monetary policy. However, because the use of the dollar as a medium of exchange with the ruble would increase the quantity of U.S. currency in circulation, the establishment of a currency board would help lessen any effects on the U.S. monetary base and help facilitate the conduct of monetary policy.

Are commodity prices a good leading indicator of general price inflation?

Posted July 1, 1998

The usefulness of commodity prices as a leading indicator of general price inflation is questionable because they are dependent upon the type of demand shift that occurs, for example, economy-wide demand shocks (i.e. oil shock of the 1970s)or shifts in the relative demand for commodities and goods.

Does inflation hurt long-run economic growth?

Posted June 1, 1998

Discusses the relationship between inflation and distortions in economic decisions, which can have adverse effects on long-term economic growth by creating additional costs such as an inflation risk premium, and in the case of high rates of inflation, an inflation tax.

What is behind the currency crisis in East Asia?

Posted April 1, 1998

Details some of the factors that led to the East Asian currencycrisis and how some countries tried to fight off attacks ontheir currencies in order to avoid currency depreciation.

What is Taylor’s rule?

Posted March 1, 1998

One of the few rules referenced in designing and implementing monetary policy, the Taylor Rule provides recommendations for setting real-short term interest rates according to factors such as actual inflation vs. targeted inflation and the level of full employment. In all, it guides policy to help a central bank achieve both its short-run goals for stabilizing the economy and its long-run goals for keeping inflation low.