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Is the Risk of the Lower Bound Reducing Inflation?
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.
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Impact of U.S. Labor Productivity Losses from Extreme Heat
Extreme heat decreases labor productivity in sectors like construction, where much work occurs outdoors. Because construction is an important component of investment, lost productivity today will slow how much capital is built up for future use and thus can have long-lasting impacts on overall economic outcomes. Combining estimates of lost labor productivity due to extreme heat with a model of economic growth suggests that, by the year 2200, extreme heat will reduce the U.S. capital stock by 5.4% and annual consumption by 1.8%.
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When Is Shelter Services Inflation Coming Down?
Shelter costs are one of the largest expenses for most households and an important component of overall inflation. It is therefore important to understand why shelter costs have remained stubbornly high. A key explanation is that, especially since the pandemic, demand for housing has been growing faster than new units have come into the market. Using the gap between the demand for and supply of housing along with other leading indicators of shelter prices can help assess whether shelter inflation will continue on a path toward historically normal levels.
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Policy Applications of a Global Macroeconomic Model
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.
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Linkages between Monetary and Regulatory Policy: Lessons from the Crisis
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.
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Has China’s Economy Become More “Standard”?
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.
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Is Demand or Supply More Important for Inflation?
Simulations using a Phillips curve-type relationship provide insights into the importance of demand versus supply for inflation over different periods. The decade of low inflation after the Great Recession was driven mainly by supply forces. Given that monetary policy operates to influence demand but not supply, this result helps to account for the persistent undershooting of the Fed’s 2% inflation goal during these years. In contrast, the period of high inflation during the pandemic era was driven mainly by demand forces.
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Monetary Policy in an Era of Crises
The enormous and prolonged economic fallout from the global financial crisis and the subsequent deleveraging have convincingly demonstrated the need to mitigate the risk of crisis. We should have known this from the work of Carmen Reinhart and Ken Rogoff (2009), but the lesson has finally stuck. My topic this afternoon centers on the role […]
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Recent Spike in Immigration and Easing Labor Markets
The Congressional Budget Office recently raised its demographic projections for net U.S. immigration. Most of the increase in the projections came from undocumented immigrants. Updating the CBO estimates with recent data points shows a continuing strong inflow of undocumented migrants. Analysis linking the revised estimates for this group to labor market statistics shows that immigrants joining the workforce are likely to have modestly eased labor market tightness.