Too-big-to-fail after FDICIA. -- Larry D. Wall

FEDERAL RESERVE BANK OF ATLANTA. Economic Review. v. 95, no. 1. 2010

Subjects:
Federal Deposit Insurance Corporation Improvement Act of 1991. Deposit insurance.

Abstract:
This reprint of a 1993 article outlines what Congress intended the Federal Deposit Insurance Corporation Improvement Act of 1991 to accomplish. A new preface discusses FDICIA's successes and failures as well as research calling for clearer policies to deal with the problem of "too big to fail" banks.
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Is more still better? Revisiting the Sixth District Coincident Indicator. -- Pedro Silos and Diego Vilán

FEDERAL RESERVE BANK OF ATLANTA. Economic Review. v. 94, no. 3. 2009

Abstract:
A revised version of the D6 Factor model of the southeastern economy is better than the original at describing contemporary economic activity and allows for historical comparisons across several business cycles.
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Changes in the aggregate labor force participation rate. -- Julie L. Hotchkiss

FEDERAL RESERVE BANK OF ATLANTA. Economic Review. v. 94, no. 4. 2009

Abstract:
This paper presents a simple methodology for decomposing changes in the aggregate labor force participation rate (LFPR) into demographic group changes in both participation behavior and population shares. Changes in population shares dominated behavioral changes in the historical evolution of the aggregate LFPR
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Two cheers for the Monetary Control Act. -- Katy Jacob, Daniel Littman, Richard D. Porter and Wade Rousse

FEDERAL RESERVE BANK OF CHICAGO. Chicago Fed Letter. 275. Jun, 2010

Abstract:
This article explains how the Monetary Control Act (MCA) of 1980 paved the way for the transition away from paper to electronic check clearing and processing, ultimately leading to the successful implementation of the Check Clearing for the 21st Century Act (Check 21) in 2003.
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Chicago Fed National Activity Index turns ten - analyzing its first decade of performance. -- Scott Brave and R. Andrew Butters

FEDERAL RESERVE BANK OF CHICAGO. Chicago Fed Letter. 273. Apr, 2010

Abstract:
This article discusses how the Chicago Fed National Activity Index has performed as a “real-time” indicator of economic activity and related inflationary pressure.
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What is behind the rise in long-term unemployment? -- Daniel Aaronson, Bhashkar Mazumder and Shani Schechter

FEDERAL RESERVE BANK OF CHICAGO. Economic Perspectives. v. 34, no. 2. Q II, 2010 - p. 28-51.

Abstract:
This article analyzes what is behind the recent unprecedented rise in long-term unemployment and explains what this rise might imply for the economy going forward. In particular, the authors attribute the sharp increase in unemployment duration in 2009 to especially weak labor demand and, to a lesser degree, extensions in unemployment insurance benefits.
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Do labor market activities help predict inflation? -- Luojia Hu and Maude Toussaint-Comeau

FEDERAL RESERVE BANK OF CHICAGO. Economic Perspectives. v. 34, no. 2. Q II, 2010 - p. 52-63.

Abstract:
The authors conduct an empirical analysis of the role of labor market activities in inflation and conclude that wage growth is not very informative for predicting price inflation. But price inflation does seem to help predict wage growth.
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Interest rates following financial re-regulation. -- Jeffrey R. Campbell and Zvi Hercowitz

FEDERAL RESERVE BANK OF CHICAGO. Economic Perspectives. v. 34, no. 1. Q I, 2010 - p. 2-13.

Abstract:
This article uses a calibrated general-equilibrium model of lending from the wealthy to the middle class to evaluate the effects of tightening household lending standards. The authors simulate a rise in down payment and amortization rates from their average values in the late 1990s and early 2000s to levels more typical of the era before the financial deregulation of the early 1980s. Their results show a drop in loan demand. This substantially lowers interest rates for an extended period. Counterintuitively, tightening lending standards makes borrowers better off.
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Measuring the equilibrium real interest rate. -- Alejandro Justiniano and Giorgio E. Primiceri

FEDERAL RESERVE BANK OF CHICAGO. Economic Perspectives. v. 34, no. 1. Q I, 2010 - p. 14-27.

Abstract:
The equilibrium real interest rate represents the real rate of return required to keep the economy’s output equal to potential output. This article discusses how to measure the equilibrium real interest rate, using an empirical structural model of the economy.
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Manning the gates: migration policy in the Great Recession. -- Mike Nicholson and Pia Orrenius

FEDERAL RESERVE BANK OF DALLAS. Economic Letter. v. 5, no. 5. Jun, 2010

Abstract:
During the downturn, advanced economies as well as developing countries adopted policies ranging from keeping new migrants out to encouraging resident migrants to leave.
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Cycle-resistant credit systems: learning from Hong Kong’s experience. -- Ying Guan, Jeffery W. Gunther and Sophia Tsai

FEDERAL RESERVE BANK OF DALLAS. Economic Letter. v. 5, no. 6. Jun, 2010

Abstract:
Hong Kong’s home mortgage market has remained among the world’s most stable. Supervisory authorities point to the 70 percent loan-to-value policy.
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Coordination of expectations in the recent crisis: private actions and policy responses. -- Russell Cooper and Jonathan L. Willis

FEDERAL RESERVE BANK OF KANSAS CITY. Economic Review. v. 95, no. 1. Q I, 2010 - p. 5-39.

Abstract:
Some of the events of the recent financial crisis have made clear the importance of expectations in an economy. The economic choices individuals make are often based on their expectations of what other people will do—in what economists call a “coordination game.” In such situations, changes in the beliefs of what others may do can affect the actions of individuals. A key element in such situations is that, as the collective beliefs change and individuals respond to these altered expectations, the outcome in the marketplace can change. In the recent crisis, the coordination of expectations played a key role in areas such as financial markets, the housing market, and the automobile sector. When the coordination of expectations results in a crisis or a panic, policymakers are the primary group with the ability to alter the expectations of individuals. By using various policy tools, policymakers can lessen the damage from the crisis. Such tools include providing guarantees and changing marketplace incentives such as interest rates and tax rates. Cooper and Willis develop a framework to illustrate how the coordination of expectations was instrumental in the economic and financial crisis. The framework also helps describe the actions policymakers took to limit the severity of the downturn by coordinating expectations to achieve more positive outcomes.
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Financial stability reports: how useful during a financial crisis? -- Jim Wilkinson, Kenneth Spong and Jon Christensson

FEDERAL RESERVE BANK OF KANSAS CITY. Economic Review. v. 95, no. 1. Q I, 2010 - p. 41-70.

Abstract:
Many of the origins of the recent financial crisis were in the United States, beginning with subprime mortgages and mortgage securities. As the crisis spread globally, few market participants or regulatory authorities saw it coming and all underestimated its severity. In the United States, the crisis has sparked many proposals to address its perceived causes and prevent a recurrence. One approach already used in many other countries is publishing financial stability reports. These reports review the condition of the financial system, identify and assess risks to the system, and suggest market or policy changes to address significant risk concerns. They are usually prepared by the country’s central bank and appear on a regular basis. Wilkinson, Spong, and Christensson analyze the financial stability reports prepared by four European countries that were affected by the financial crisis the United Kingdom, Sweden, the Netherlands, and Spain. They find that these four reports were generally successful in identifying the risks that played important roles in the crisis although they underestimated the severity of this crisis. While it is not clear that the reports helped to reduce the damages, it would be a mistake to dismiss them as a useful tool. Overall, publishing financial stability reports appears to be a worthwhile exercise that encourages central banks and international authorities to identify and monitor important financial trends and emerging risks and to develop a better understanding of the underlying structure of domestic and global financial markets.
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Regulating debit cards: the case of ad valorem fees. -- Zhu Wang

FEDERAL RESERVE BANK OF KANSAS CITY. Economic Review. v. 95, no. 1. Q I, 2010 - p. 71-93.

Abstract:
Debit cards have become an indispensable part of the U.S. payments system, accounting for more than a third of consumer payments at point of sale. With this development has come controversy: Card networks charge merchants fees that merchants believe are too high. And most of the fees are ad valorem that is, based on transaction value rather than fixed fees per transaction. Given that debit cards incur a fixed cost per transaction, why do networks charge ad valorem fees? How do ad valorem fees affect payment market participants, including consumers, merchants, and card networks? And should policymakers consider regulating debit cards by requiring fixed per-transaction fees? Wang explores this controversy about debit card fee structures. His analysis shows that, when card networks and merchants both have market power, card networks earn a higher profit by charging ad valorem fees than fixed per-transaction fees. At the same time, merchant profits are reduced yet both consumer surplus and social welfare are increased. As an alternative, policymakers might consider regulating the debit fee structure simply by requiring fixed per-transaction fees (but allowing card networks to freely set the fee levels). Wang suggests, however, that this alternative may increase merchant profits at the expense of card networks, consumers, and social welfare. Therefore, caution should be taken when policymakers consider intervening in the debit card market.
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Will the rural economy rebound in 2010? -- Jason Henderson

FEDERAL RESERVE BANK OF KANSAS CITY. Economic Review. v. 95, no. 1. Q I, 2010 - p. 95-119.

Abstract:
As the U.S. economy emerges from recession, prospects for a rural rebound in 2010 are also rising. After months of sharp contraction, the nation’s GDP rose solidly in the second half of 2009. Rural job losses also slowed as the year progressed, and commodity prices rebounded, spurring some optimism that farm profits could soon stabilize. The nation’s economic gains, however, have lacked the strength to spur robust job gains or bolster incomes, raising the specter of another jobless recovery. As the recoveries following the 1990-91 and 2001 recessions struggled to create jobs, rural areas enjoyed stronger job growth than their metro counterparts. This time around, rural economies have kept pace with their metro peers. But the question remains: Can rural economies rebound more quickly in the year ahead? Henderson reviews the state of the rural economy heading into 2010. He describes how falling demand brought an end to the farm boom in 2009. Next, he examines the impacts of the recession and financial crisis on rural Main Street activity. Finally, he explores how the rural economy in 2010 may be shaped by the national recovery and how stronger global economies and a weak dollar could offer new export opportunities in the year ahead.
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The new ACRE program: costs and effects. -- Brian C. Briggeman and Jody Campiche

FEDERAL RESERVE BANK OF KANSAS CITY. The Main Street Economist. 2. 2010

Abstract:
In 2010, many farmers will again choose between farm safety net programs offered by the U.S. government. They can remain in the more-familiar 2002 farm program, which protects against price declines and provides traditional direct payments. Or, they can enroll in the new Average Crop Revenue Election (ACRE) program, which protects against revenue shortfalls caused by falling prices or low yields. But ACRE requires farmers to give up a significant portion of their traditional 2002 farm program payments. Changing farm programs, especially ACRE, presents different costs and effects for not only farmers but taxpayers, too.
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Laboring to recover: as the nation's economy rebounds, unemployment continues to rise. -- Brye Steeves

FEDERAL RESERVE BANK OF KANSAS CITY. TEN. Win, 2010 - p. 7-11.

Subjects:
Unemployment. Labor market.

Abstract:
Changes in the labor market and the effects of the banking crisis may mean unemployment will recover much more slowly compared to past severe recessions.
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Livestock's long road: recession, global pullback weigh on producers. -- Bill Medley

FEDERAL RESERVE BANK OF KANSAS CITY. TEN. Win, 2010 - p. 12-15.

Abstract:
Many hog and cattle producers are seeing big profit losses, or even going out of business. The economic downturn—and consumer behavior—are complicating the industry’s decline.
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Coming home: resurgence of working-age residents may boost rural economies. -- Brye Steeves

FEDERAL RESERVE BANK OF KANSAS CITY. TEN. Win, 2010 - p. 17-21.

Abstract:
Small towns struggle with dwindling populations as young adults leave, but the return of older residents can offset this out-migration with their contributions to the local workforce.
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Residential mortgages and community banks: smaller insured financial institutions see less decline. -- Brye Steeves

FEDERAL RESERVE BANK OF KANSAS CITY. TEN. Win, 2010 - p. 22-25.

Abstract:
Small towns struggle with dwindling populations as young adults leave, but the return of older residents can offset this out-migration with their contributions to the local workforce.
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Distortionary taxation for efficient redistribution. -- Borys Grochulski

FEDERAL RESERVE BANK OF RICHMOND. Economic Quarterly. v. 95, no. 3. Sum, 2009 - p. 235-267.

Subjects:
Taxation.

Abstract:
This article uses a simple model to review the economic theory of efficient redistributive taxation. The model economy is a Lucas-tree economy, in which income comes from a stock of productive capital. Agents, who own the capital stock, are heterogenous with respect to their preference for early versus late consumption. A competitive capital market, in equilibrium, supports a unique Pareto-efficient allocation of consumption among the agents, i.e., the First Welfare Theorem holds. The equilibrium allocation represents one efficient division of the total gains from trade that are available in the economy. All other efficient divisions of the gains from trade, represented by a continuum of other Pareto-efficient allocations, are inconsistent with competitive capital market equilibrium. If agents' preference types are public information, nondistortionary wealth transfers are sufficient to implement any Pareto optimum as a market equilibrium, i.e., the classic Second Welfare Theorem holds. If agents' preferences are private information, however, the classic Second Welfare Theorem fails. A class of distortionary tax systems is characterized under which a modified Second Welfare Theorem holds: Every constrained-Pareto-optimal allocation can be supported as an equilibrium subject to distortionary taxes.
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The behavior of household and business investment over the business cycle. -- Kausik Gangopadhyay and Juan Carlos Hatchondo

FEDERAL RESERVE BANK OF RICHMOND. Economic Quarterly. v. 95, no. 3. Sum, 2009

Subjects:
Business cycles.

Abstract:
This article describes the main characteristics of the cyclical behavior of household and business investment over the cycle in the United States and reviews the most prominent studies that have tried to explain the dynamics of these two investment components. We conclude that even though there have been advances in the understanding of the behavior of these two investment components, more research is needed. One important limitation of existing studies is that they either abstract from changes in the relative price of houses or they generate house price movements that are not aligned with the data.
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Short-term headline-core inflation dynamics. -- Yash P. Mehra and Devin Reilly

FEDERAL RESERVE BANK OF RICHMOND. Economic Quarterly. v. 95, no. 3. Sum, 2009 - p. 289-313.

Subjects:
Inflation (Finance). Monetary policy.

Abstract:
This article investigates empirically short-term dynamics between headline and core measures of consumer price index and personal consumption expenditure inflation over three sample periods: 1959:1-1979:1, 1979:2-2001:2, and 1985:1-2007:2. Headline and core inflation measures are co-integrated, suggesting long-run co-movement. However, the ways these two variables adjust to each other in the short run and generate co-movement have changed across these sample periods. In the pre-1979 sample period, when a positive gap opens up with headline inflation rising above core inflation, the gap is eliminated mainly as a result of headline inflation not reverting and core inflation moving toward headline inflation. These dynamics suggest headline inflation would be better than core inflation in assessing the permanent component of inflation. In post-1979 sample periods, however, the positive gap is eliminated as a result of headline inflation reverting more strongly toward core inflation than core inflation moving toward headline inflation, suggesting core inflation would be better than headline inflation in assessing the permanent component of inflation. This change in headline-core inflation dynamics may be due to the Federal Reserve having convinced the public it would no longer accommodate shocks to food and energy prices.
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Why could political incentives be different during election times? -- Leonardo Martinez

FEDERAL RESERVE BANK OF RICHMOND. Economic Quarterly. v. 95, no. 3. Sum, 2009 - p. 315-334.

Subjects:
Business cycles.

Abstract:
Why could political incentives be different during election times? This article provides answers to this question using a career-concern model of political cycles. The analysis in the article is also relevant to understanding other agency relationships in which an important part of compensation is decided on infrequently.
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Is the output gap a faulty gauge for monetary policy? -- Thomas Lubik

FEDERAL RESERVE BANK OF RICHMOND. Richmond Fed Economic Brief. 10-01. Jan, 2010

Abstract:
Policymakers look to the output gap as a measure of how the economy is performing. However, different methods of computing the output gap can lead to vastly different results, rendering it a potentially poor guide.
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Is a new asset bubble emerging in certain markets? -- Renee Courtois, Brian Gaines, and Juan Carlos Hatchondo

FEDERAL RESERVE BANK OF RICHMOND. Richmond Fed Economic Brief. 10-02. Feb, 2010

Abstract:
Some economists have argued that recent rallies in certain asset markets — most notably, commodities and emerging market equities — represent the emergence of a new bubble fueled by accommodative monetary policy and carry trade activity. There is evidence, though, that the rallies can be explained by strong economic fundamentals in these markets.
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Comparing labor markets across recessions: a focus on the age composition of the population. -- Marianna Kudlyak, Devin Reilly, and Stephen Slivinski

FEDERAL RESERVE BANK OF RICHMOND. Richmond Fed Economic Brief. 10-04. Apr, 2010

Abstract:
Simply looking at unadjusted versions of traditional statistics may not be the best way to compare the state of the current economy to previous periods. When comparing recessions, it is important to account for demographic changes.
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Is there stigma associated with discount window borrowing? -- Renee Courtois and Huberto M. Ennis

FEDERAL RESERVE BANK OF RICHMOND. Richmond Fed Economic Brief. 10-05. May, 2010

Abstract:
There is considerable anecdotal and empirical evidence suggesting that banks are reluctant to borrow from the Fed's discount window. This behavior is commonly explained as the result of stigma attached to this source of funding, though stigma is hard to establish conclusively. New theoretical research provides a formal framework to analyze stigma, including the recent policies introduced to deal with it.
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Monetary policy in a low inflation economy with learning. -- John C. Williams

FEDERAL RESERVE BANK OF SAN FRANCISCO. Economic Review. 2010 - p. 1-12.

Subjects:
Monetary policy. Inflation (Finance)

Abstract:
In theory, monetary policies that target the price level, as opposed to the inflation rate, should be highly effective at stabilizing the economy and avoiding deflation in the presence of the zero lower bound on nominal interest rates. With such a policy, if the short-term interest rate is constrained at zero and the inflation rate declines below its trend, the public expects that policy will eventually engineer a period of above-trend inflation that restores the price level to its target level. Expectations of future monetary accommodation stimulate output and inflation today, mitigating the effects of the zero bound. The effectiveness of such a policy strategy depends crucially on the alignment of the public’s and the central bank’s expectations of future policy actions. This article considers an environment where private agents have imperfect knowledge of the economy and therefore continuously reestimate the forecasting model that they use to form expectations. I find that imperfect knowledge on the part of the public, especially regarding monetary policy, can undermine the effectiveness of price-level targeting strategies that would work well if the public had complete knowledge. For low inflation targets, the zero lower bound can cause a dramatic deterioration in macroeconomic performance with severe recessions occurring with alarming frequency. However, effective communication of the policy strategy that reduces the public’s confusion about the future course of monetary policy significantly reduces the stabilization costs associated with the zero bound. Finally, the combination of learning and the zero bound implies the need for a stronger policy response to movements in the price level than would otherwise be optimal. Such a policy is effective at stabilizing both inflation and output in the presence of learning and the zero bound even with a low inflation target.
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State business taxes and investment: state-by-state simulations. -- Robert S. Chirinko and Daniel J. Wilson

FEDERAL RESERVE BANK OF SAN FRANCISCO. Economic Review. 2010 - p. 13-28.

Subjects:
Taxation. State finance.

Abstract:
This article develops a framework for simulating the effects of state business taxes on state investment and output. Our simulations provide the predicted increase in investment—both in equipment and structures (E&S) and in research and development (R&D)—and the predicted increase in output for a given state resulting from a specified change in one of its three tax policies—the E&S investment tax credit, the R&D tax credit, or the corporate income tax. The simulations depend on a set of formulas linking economic parameters and state data to investment and output, all of which are reported in this article. We report results, based on our preferred set of parameters, for each of the 48 contiguous states. We also discuss alternative parameter values and explore the resulting sensitivity of predicted changes in state investment and output. Finally, we describe a simple web tool that we have made available online (www.frbsf.org/csip/taxapp.php) that allows users to insert their own preferred parameter values and simulate the economic effects for the state and tax policy of their choosing.
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Inflation: mind the gap. -- Zheng Liu and Glenn Rudebusch

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-02. Jan 19, 2010

Subjects:
Inflation (Finance). Unemployment. Phillips curve.

Abstract:
This Economic Letter examines recent evidence concerning the connection between unemployment and inflation. We argue that, in a deep economic downturn such as the current one, inflation and unemployment do tend to move together in a manner consistent with the Phillips curve. But, outside of such severe recessions, fluctuations in the inflation and unemployment rates do not line up particularly well. Inflation appears to be buffeted by many other factors. This explains why some studies find only a "loose empirical relationship" between economic slack and inflation. Thus, compared with the relatively tranquil period between the mid-1980s and the mid-2000s, evidence suggests that recent high unemployment rates are broadly consistent with the sizable decline in core inflation since the fourth quarter of 2007, a relationship that broadly fits the Phillips curve model.
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Mortgage choice and the pricing of fixed-rate and adjustable-rate mortgages. -- John Krainer

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-03. Feb 1, 2010

Subjects:
Mortgage loans. Mortgages.

Abstract:
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. This Economic Letter reviews some of the factors determining consumer mortgage choices. It shows that ARM share has declined in ways that parallel the behavior of several key mortgage market interest rates. These developments have coincided with, among other things, Fed intervention in the market through large-scale MBS purchases. Thus, the Fed program, while supporting the functioning of the residential mortgage market overall, could have affected the composition of the mortgage market. To help understand this dynamic, this Letter estimates what the ARM share might have been under alternative scenarios in which fixed mortgage rates were higher, which would likely have been the case if the Fed had not been intervening in the market to the extent that it did.
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Diagnosing recessions. -- Òscar Jordà

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-05. Feb 16, 2010

Subjects:
Recessions.

Abstract:
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 sometime between June and August 2009.
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Can structural models of default explain the credit spread puzzle? -- Robert Goldstein

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-06. Feb 22, 2010

Subjects:
Credit. Corporate bonds.

Abstract:
This Economic Letter discusses why standard versions of structural models of default tend to underpredict the level of risk premiums and variations in those premiums over time. Drawing on recent research, the Letter suggests modifications to these standard models in order to better explain historical levels and time variations of corporate bond spreads.
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Extended unemployment and UI benefits. -- Rob Valletta and Katherine Kuang

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-12. Apr 19, 2010

Subjects:
Unemployment. Unemployment insurance.

Abstract:
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.
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The U.S. and world economic geography before and after the downturn: conference summary. -- Daniel Wilson

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-13. Apr 26, 2010

Subjects:
Urban economics. Economic development.

Abstract:
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.
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Is the "invisible hand" still relevant? -- Stephen LeRoy

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-14. May 3, 2010

Subjects:
Markets. Competition. Economic policy.

Abstract:
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.
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The shape of things to come. -- Justin Weidner and John C. Williams

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-15. May 17, 2010

Subjects:
Recessions.

Abstract:
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..
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Loss provisions and bank charge-offs in the financial crisis: lesson learned. -- Fred Furlong and Zena Knight

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-16. May 24, 2010

Subjects:
Bank loans. Bank capital. Risk management.

Abstract:
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.
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The “inflation” in inflation targeting. -- Richard Dennis

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-17. Jun 7, 2010

Subjects:
Inflation (Finance). Monetary policy.

Abstract:
Many central banks conduct monetary policy according to an inflation-targeting framework. Central to such a framework is the principle that monetary policy decisions are formulated in the context of an explicitly announced numerical target or range for some measure of inflation. Obviously, if an inflation-targeting framework is to be operational, then the important question of what measure of inflation to target cannot be avoided. There is unlikely to be a single answer to the question of which measure is best. And, indeed, inflation-targeting countries have varied significantly in the measures they have selected. This Economic Letter uses U.S. data to discuss some of the principles and issues involved in choosing an inflation measure to target.
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The Fed's exit strategy for monetary policy. -- Glenn D. Rudebusch

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-18. Jun 14, 2010

Subjects:
Monetary policy. Liquidity (Economics)

Abstract:
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.
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Challenges in economic capital modeling. -- Jose A. Lopez

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-19. Jun 21, 2010

Subjects:
Capital. Risk management.

Abstract:
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.
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Fiscal crises of the states: causes and consequences. -- Jeremy Gerst and Daniel Wilson

FEDERAL RESERVE BANK OF SAN FRANCISCO. FRBSF Economic Letter. 2010-20. Jun 28, 2010

Subjects:
State finance. Revenue. Taxation. Finance, Public.

Abstract:
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.
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Why income per worker differs worldwide. -- Riccardo DiCecio

FEDERAL RESERVE BANK OF ST. LOUIS. Economic Synopses. 7. 2010

Subjects:
Income. Income distribution. Productivity.

Abstract:
A higher entry cost distorts the industry structure and the allocation of productive factors across firms, which results in lower total factor productivity and output per worker.
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When will business lending pick up? -- David C. Wheelock

FEDERAL RESERVE BANK OF ST. LOUIS. Economic Synopses. 8. 2010

Subjects:
Bank loans. Commercial loans.

Abstract:
The recent declines in tightening of lending standards suggest that business lending may be poised for a rebound.
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"How central should the central bank be?" a comment. -- Christopher J. Neely

FEDERAL RESERVE BANK OF ST. LOUIS. Economic Synopses. 10. 2010

Subjects:
Banks and banking, Central.

Abstract:
The Reserve Bank presidents are fully accountable to our democratic institutions and the decentralized structure promotes healthy debate on monetary policy and regulatory issues.
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Monetary policy and asset prices. -- Brett W. Fawley and Luciana Juvenal

FEDERAL RESERVE BANK OF ST. LOUIS. Economic Synopses. 11. 2010

Subjects:
Monetary policy. Asset pricing.

Abstract:
The housing market crisis is the latest reminder that asset prices can and do run wild at rates capable of negative effects on real economic activity. Not surprisingly, this has reinvigorated debate over whether central banks should respond to asset price bubbles.
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Three lessons for monetary policy from the panic of 2008. -- James Bullard

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 3. May, 2010 - p. 155-163.

Subjects:
Monetary policy.

Abstract:
We have been wrestling with one of the most severe recessions in the post-World War II era; moreover, it has been accompanied by a widespread financial crisis. After unprecedented policy responses, there are signs of recovery on both fronts. So, it is not too early to take stock of our actions and attempt to learn lessons from our recent past - lessons for monetary policy, financial regulation, and other aspects of the crisis. My objective here is to focus on lessons for monetary policy alone and leave discussion of regulatory issues and financial markets for another day.
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Getting back on track: macroeconomic policy lessons from the financial crisis. -- John B. Taylor

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 3. May, 2010 - p. 165-176.

Subjects:
Macroeconomics. Financial crises.

Abstract:
This article reviews the role of monetary and fiscal policy in the financial crisis and draws lessons for future macroeconomic policy. It shows that policy deviated from what had worked well in the previous two decades by becoming more interventionist, less rules-based, and less predictable. The policy implications are thus that policy should "get back on track." The article is a modified version of a presentation given at the Federal Reserve Bank of Philadelphia's policy forum "Policy Lessons from the Economic and Financial Crisis," December 4, 2009. The presentation was made during a panel discussion that also included James Bullard and N. Gregory Mankiw.
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Questions about fiscal policy: Implications from the financial crisis of 2008-2009. -- N. Gregory Mankiw

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 3. May, 2010 - p. 177-183.

Subjects:
Financial crises. Fiscal policy.

Abstract:
This article is a modified version of remarks given at the Federal Reserve Bank of Philadelphia's policy forum "Policy Lessons from the Economic and Financial Crisis," December 4, 2009. The presentation was made during a panel discussion that also included James Bullard and John Taylor.
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Nonlinear effects of school quality on house prices. -- Abbigail Chiodo, Rubén Hernández-Murillo, and Michael T. Owyang

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 3. May, 2010 - p. 185-204.

Subjects:
Education - Economic aspects. Public schools.

Abstract:
We reexamine the relationship between quality of public schools and house prices and find it to be nonlinear. Unlike most studies in the literature, we find that the price premium parents must pay to buy a house in an area associated with a better school increases as school quality increases. This is true even after controlling for neighborhood characteristics, such as the racial composition of neighborhoods, which is also capitalized into house prices. In contrast to previous studies that use the boundary discontinuity approach, we find that the price premium from school quality remains substantially large, particularly for neighborhoods associated with high-quality schools.
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Institutional causes of output volatility. -- Levon Barseghyan and Riccardo DiCecio

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 3. May, 2010 - p. 205-224.

Subjects:
Macroeconomics. Production (Economic theory)

Abstract:
The authors investigate the relationship between the quality of institutions and output volatility. Using instrumental variable regressions, they address whether higher entry barriers and lower property rights protection lead to higher volatility. They find that a 1-standard-deviation increase in entry costs increases the standard deviation of output growth by roughly 40 percent of its average value in the sample. In contrast, property rights protection has no statistically significant effect on volatility.
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Editor's Introduction. -- William T. Gavin

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 4. Jul, 2010 - p. 225-28.

In: Thirty-Fourth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis

Subjects:
Monetary policy. Debt. Financial markets.

Abstract:
We have been wrestling with one of the most severe recessions in the post-World War II era; moreover, it has been accompanied by a widespread financial crisis. After unprecedented policy responses, there are signs of recovery on both fronts. So, it is not too early to take stock of our actions and attempt to learn lessons from our recent past - lessons for monetary policy, financial regulation, and other aspects of the crisis. My objective here is to focus on lessons for monetary policy alone and leave discussion of regulatory issues and financial markets for another day.
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Conventional and unconventional monetary policy. -- Vasco Cúrdia, Michael Woodford

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 4. Jul, 2010 - p. 229-64.

In: Selected Articles from the Thirty-Fourth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis

Subjects:
Monetary policy
.

Abstract:
The authors extend a standard New Keynesian model to incorporate heterogeneity in spending opportunities and two sources of (potentially time-varying) credit spreads and to allow a role for the central bank?s balance sheet in equilibrium determination. They use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions, and to consider additional dimensions of central bank policy?variations in the size and composition of the central bank?s balance sheet and payment of interest on reserves?alongside the traditional question of the proper choice of setting an operating target for an overnight policy rate. The authors also give particular attention to the special problems that arise when the policy rate reaches the zero lower bound. They show that it is possible within a single unified framework to identify the criteria for policy to be optimal along each dimension. The suggested policy prescriptions apply equally well when financial markets work efficiently as when they are substantially disrupted and interest rate policy is constrained by the zero lower bound.
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New monetarist economics: methods. -- Stephen Williamson, Randall Wright

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 4. Jul, 2010 - p. 265-302.

In: Selected Articles from the Thirty-Fourth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis

Subjects:
Monetary policy
.

Abstract:
This essay articulates the principles and practices of New Monetarism, the authors? label for a recent body of work on money, banking, payments, and asset markets. They first discuss methodological issues distinguishing their approach from others: New Monetarism has something in common with Old Monetarism, but there are also important differences; it has little in common with Keynesianism. They describe the principles of these schools and contrast them with their approach. To show how it works in practice, they build a benchmark New Monetarist model and use it to study several issues, including the cost of inflation, liquidity, and asset trading. They also develop a new model of banking.
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Asset prices, liquidity, and monetary policy in the search theory of money. -- Ricardo Lagos

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 4. Jul, 2010 - p. 303-10.

In: Selected Articles from the Thirty-Fourth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis

Subjects:
Monetary policy. Financial markets
.

Abstract:
The author presents a search-based model in which money coexists with equity shares on a risky aggregate endowment. Agents can use equity as a means of payment, so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange. The author characterizes a family of optimal monetary policies and finds that the resulting equity prices are independent of monetary considerations. The author also studies monetary policies that target a constant, but nonzero, nominal interest rate and finds that to the extent that a financial asset is valued as a means to facilitate transactions, the asset?s real rate of return will include a liquidity return that depends on monetary considerations. Through this liquidity channel, persistent deviations from an optimal monetary policy can cause the real prices of assets that can be used to relax trading constraints to exhibit persistent deviations from their fundamental values.
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Reading the recent monetary history of the United States, 1959-2007. -- Jesús Fernández-Villaverde, Pablo Guerrón-Quintana, Juan F. Rubio-Ramírez

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 4. Jul, 2010 - p. 311-38.

In: Selected Articles from the Thirty-Fourth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis

Subjects:
Monetary policy - United States. Economic conditions - United States
.

Abstract:
In this paper the authors report the results of the estimation of a rich dynamic stochastic general equilibrium (DSGE) model of the U.S. economy with both stochastic volatility and parameter drifting in the Taylor rule. They use the results of this estimation to examine the recent monetary history of the United States and to interpret, through this lens, the sources of the rise and fall of the Great Inflation from the late 1960s to the early 1980s and of the Great Moderation of business cycle fluctuations between 1984 and 2007. Their main findings are that, while there is strong evidence of changes in monetary policy during Chairman Paul Volcker?s tenure at the Federal Reserve, those changes contributed little to the Great Moderation. Instead, changes in the volatility of structural shocks account for most of it. Also, although the authors find that monetary policy was different under Volcker, they do not find much evidence of a big difference in monetary policy among the tenures of Chairmen Arthur Burns, G. William Miller, and Alan Greenspan. The difference in aggregate outcomes across these periods is attributed to the time-varying volatility of shocks. The history for inflation is more nuanced, as a more vigorous stand against it would have reduced inflation in the 1970s, but not completely eliminated it. In addition, they find that volatile shocks (especially those related to aggregate demand) were important contributors to the Great Inflation.
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Seven faces of "the peril" -- James Bullard

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 5. Sep, 2010 - p. 339-52.

Subjects:
Monetary policy - United States. Deflation (Finance) - Japan. Japan.

Abstract:
In this paper the author discusses the possibility that the U.S. economy may become enmeshed in a Japanese-style deflationary outcome within the next several years. To frame the discussion, the author relies on an analysis that emphasizes two possible long-run steady states for the economy: one that is consistent with monetary policy as it has typically been implemented in the United States in recent years and one that is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period. The data considered seem to be quite consistent with the two steady-state possibilities. The author describes and critiques seven stories that are told in monetary policy circles regarding this analysis and emphasizes two main conclusions: (i) The Federal Open Market Committee?s ?extended period? language may be increasing the probability of a Japanese-style outcome for the United States and (ii), on balance, the U.S. quantitative easing program offers the best tool to avoid such an outcome.
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The economic progress of African Americans in urban areas: a tale of 14 cities. -- Dan A. Black, Natalia Kolesnikova, and Lowell J. Taylor

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 5. Sep, 2010 - p. 353-79.

Subjects:
African Americans - Economic conditions. Demography. Education.

Abstract:
How significant was the economic progress of African Americans in the United States between 1970 and 2000? In this paper the authors examine this issue for black men 25 to 55 years of age who live in 14 large U.S. metropolitan areas. They present the evidence that significant racial disparities remain in education and labor market outcomes of black and white men, and they discuss changes in industrial composition, migration, and demography that might have contributed to the stagnation of economic progress of black men between 1970 and 2000. In addition, the authors show that there was no progress in the financial well-being of black children, relative to white children, between 1970 and 2000.
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Measuring international trade policy: a primer on trade restrictiveness indices. -- Cletus C. Coughlin

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 5. Sep, 2010 - p. 381-94.

Subjects:
International trade. Economic policy.

Abstract:
Measuring the overall restrictiveness of a country?s international trade policies is important and, in fact, essential for estimating the effects of trade policies and for negotiations to reduce trade barriers. A good measure is also difficult to produce: Trade restrictiveness indices are constructed by combining the actual structure of trade restrictions, which is generally quite different across goods, into a single number. Under certain assumptions, this single number is the uniform tariff that would produce the same trade restrictiveness as the actual differentiated structure of restrictions. In this paper, the economic intuition underlying the construction of these indices is presented and estimates of these indices and the resulting insights are summarized.
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The geographic distribution and characteristics of U.S. bank failures, 2007-2010: do bank failures still reflect local economic conditions? -- Craig P. Aubuchon, David C. Wheelock

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 5. Sep, 2010 - p. 395-415.

Subjects:
Bank failures
.

Abstract:
The financial crisis and recession that began in 2007 brought a sharp increase in the number of bank failures in the United States. This article investigates characteristics of banks that failed and regional patterns in bank failure rates during 2007-10. The article compares the recent experience with that of 1987-92, when the United States last experienced a high number of bank failures. As during the 1987-92 and prior episodes, bank failures during 2007-10 were concentrated in regions of the country that experienced the most serious distress in real estate markets and the largest declines in economic activity. Although most legal restrictions on branch banking were eliminated in the 1990s, the authors find that many banks continue to operate in a small number of markets and are vulnerable to localized economic shocks.
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A survey of announcement effects on foreign exchange returns. -- Christopher J. Neely, S. Rubun Dey

FEDERAL RESERVE BANK OF ST. LOUIS. Review. v. 92, no. 5. Sep, 2010 - p. 417-64.

Subjects:
Foreign exchange.

Abstract:
Researchers have long studied the reaction of foreign exchange returns to macroeconomic announcements in order to infer changes in policy reaction functions and foreign exchange micro­structure, including the speed of market reaction to news and how order flow helps impound public and private information into prices. These studies have often been disconnected, however; and this article critically reviews and evaluates the literature on announcement effects on foreign exchange returns.
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