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Discussion Paper
Should We Worry About Excess Reserves?
Banks in the United States have the potential to increase liquidity suddenly and significantly?from $12 trillion to $36 trillion in currency and easily accessed deposits?and could thereby cause sudden inflation. This is possible because the nation?s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio. Banks might engage in such conversion if they believe other banks are about to do so, in a manner similar to a bank run that generates a self-fulfilling prophecy. {{p}} Policymakers could guard against this ...
Discussion Paper
Who Defaults on Their Mortgage, and Why? Policy Implications for Reducing Mortgage Default
To design mortgage modification policies that successfully stem default and allow borrowers to keep their homes, policymakers need to understand why borrowers default. Is it because they?re truly unable to pay, or are they able to pay but have negative equity? {{p}} New research finds that both motives were important during the Great Recession, but that ability to pay plays the greater role, accounting for over 60 percent of defaults. Moreover, the analysis?which matches borrowers? income, employment, and assets with their mortgage characteristics and payment status?shows that cash-strapped ...
Discussion Paper
Liquidity crises
Discussion Paper
Thoughts on the Federal Reserve System's exit strategy
How can banks and similar institutions design optimal compensation systems? Would such systems conflict with the goals of society? This paper considers a theoretical framework of how banks structure job contracts with their employees to explore three points: the structure of a socially optimal compensation system; the structure of a compensation system that is privately optimal, given the reality of government-guaranteed bank debt; and policy interventions that can lead from the second structure to the first. Analysis reveals a potential policy option: providing proper incentives to banks by ...
Discussion Paper
Is there a stable Phillips Curve after all?
The Phillips curve refers to a negative (or inverse) relationship between unemployment and inflation in an economy?when unemployment is high, inflation tends to be low, and vice versa. This inflation-unemployment link has been observed in many countries during many times, most famously by William Phillips in 1958 looking at historical data for the United Kingdom. If this relationship is stable (or ?structural?)?meaning that it holds regardless of changes in the economic environment, including policy adjustment?then policymakers might be able to trade off increases in inflation to achieve ...
Discussion Paper
A sharp drop in interstate migration? not really
Discussion Paper
On the Importance of Easing Consumer Credit Frictions
The vast bulk of the government financial interventions during the Great Recession was directed at helping banks weather the financial crisis. The design of these programs was heavily influenced by the view that helping banks preserve their means of providing finance to firms was the most important ingredient in ensuring a quick recovery from the crisis. We argue that the cross-state patterns of employment, output and debt in the United States suggest that financial frictions that led to a tightening of credit to consumers were more important in accounting for the recession than those that ...
Discussion Paper
On the Ethics of Redistribution
Analysts of optimal policy often advocate for redistributive policies within developed economies using a behind-the-veil-of-ignorance criterion. Such analyses almost invariably ignore the effects of these policies on the well-being of people in poor countries. We argue that this approach is fundamentally misguided because it violates the criterion itself.