Historical Echoes: What’s Missing in This 1953 Portrait of the American Economy?

New York Fed Research Library

In its January 1953 issue “The American and His Economy,” Life magazine presents a sidebar entitled “How Future Looks to Five Economists,” in which Paul Samuelson, John Kenneth Galbraith, and other eminent economists discuss the national outlook, given the impending defense cutbacks. Samuelson states, “Congress and the new administration have the power to alleviate any recession that might be brought on by reduced defense and investment expenditures.” The others are also optimistic, citing additional offsetting factors. What’s missing? Except for one oblique reference to “credit easing,” no one mentions the Fed or monetary policy—even though economists knew then that expansionary monetary policy (that is, lowering interest rates) can help offset contractionary fiscal policy (such as government spending cuts).

Inflation Expectations and Behavior: Do Survey Respondents Act on Their Beliefs?

Olivier Armantier, Giorgio Topa, Wilbert Van Der Klaauw, and Basit Zafar

Surveys of consumers’ inflation expectations are now a key component of monetary policy. To date, however, little work has been done on 1) whether individual consumers act on their beliefs about future inflation, and 2) whether the inflation expectations elicited by these surveys are actually informative about the respondents’ beliefs. In this post, we report on a new study by Armantier, Bruine de Bruin, Topa, van der Klaauw, and Zafar (2010) that investigates these two issues by comparing consumers’ survey-based inflation expectations with their behavior in a financially incentivized experiment. We find that the decisions of survey respondents are generally consistent with their stated inflation beliefs.

The Vanishing U.S.-E.U. Employment Gap

Christian Grisse, Thomas Klitgaard, and Ayşegül Şahin

The employment-to-population ratio—the share of adults that are employed—has historically been much higher in the United States than in Europe. However, the gap narrowed dramatically in the last decade and had almost disappeared by the end of 2009. In this post, we show that the narrowing employment gap is due to three factors: declining U.S. employment rates across almost all age-gender groups; more women working in Europe, particularly prime-age and older workers; and rising employment for older European men. We link most of these shifts to the influence of underlying trends (many reflecting changes in European social policies) and to differences in labor market performance during the Great Recession.

Historical Echoes: “South Sea Bubble” Deals Speculators a Bad Hand

New York Fed Research Library

The “South Sea Bubble” in Britain, 1720, followed the typical pattern of a period of speculation, “irrational exuberance,” and the subsequent collapse of a major company or industry. A speculative frenzy fueled by corporate deceit, investor hysteria, and other market forces caused the South Sea Company’s share price to skyrocket from £128 in January to a whopping £1,050 in June. By September, the price plummeted to £175.

Stabilizing the Tri-Party Repo Market by Eliminating the “Unwind”

Antoine Martin

On July 6, 2011, the Task Force on Tri-Party Repo Infrastructure—an industry group sponsored by the New York Fed—released a Progress Report in which it reaffirmed the goal of eliminating the wholesale “unwind” of repos (and the requisite extension of more than a trillion dollars of intraday credit by repo clearing banks), but acknowledged unspecified delays in achieving that goal. The “unwind” is the settlement of repos that currently takes place each morning and replaces credit from investors with credit from the clearing banks. As I explain in this post, by postponing settlement until the afternoon and thereby linking the settlement of new and maturing repos, the proposed new settlement approach could help stabilize the tri-party repo market by eliminating the incentive for investors to withdraw funds from a dealer simply because they believe other investors will do the same. In effect, eliminating the unwind can reduce the risk of the equivalent of bank runs in the repo market, or “repo runs.”

Which Firms Have Flexible Prices?

Rebecca Hellerstein and Pinelopi Goldberg*

Since the 1930s, the conventional wisdom among economists has held that producer prices are more rigid than consumer prices. The roots of this view lie in the 1930s-era “administered price” thesis, which states that large firms set their prices more rigidly than do small firms. In this post, we report that this old “fact” is not true. We instead find that the prices set by large firms are much more flexible than those set by small firms. A key implication of this finding is that policymakers concerned about inflation or deflation should pay particular attention to changes in large firms’ prices.

Just Released: July’s Empire State Manufacturing Survey Shows Ongoing Weakness in New York Manufacturing

Jason Bram and Richard Deitz

The July Empire State Manufacturing Survey, published today, indicates that manufacturing conditions continued to weaken in New York State. The survey’s headline index was -3.8, the second negative reading in a row, and suggested that, overall, manufacturing activity declined slightly in New York. Because the survey is a diffusion index, readings below zero indicate that more respondents reported worsening conditions than improving conditions. Lower (or higher) values of the index indicate more widespread decline (or improvement). The Empire State Manufacturing Survey is the first available indicator of manufacturing activity for the month. While it is entirely possible that what we are seeing is idiosyncratic to New York State, July’s report raises questions about whether the manufacturing sector is experiencing a temporary bump in the road, or is headed toward a more sustained slowdown. In this post, we review some of the highlights of today’s report.

Would a Stronger Renminbi Narrow the U.S.-China Trade Imbalance?

Matthew Higgins and Thomas Klitgaard

The United States buys much more from China than it sells to China—an imbalance that accounts for almost half of our overall merchandise trade deficit. China's policy of keeping its exchange rate low is often cited as a key driver of that country's large overall trade surplus and of its bilateral surplus with the United States. The argument is that a stronger renminbi (the official currency of China) would help reduce that country’s trade imbalance with the United States by lowering the prices of U.S. goods relative to those made in China. In this post, we examine the thinking behind this view. We find that a stronger renminbi would have a relatively small near-term impact on the U.S. bilateral trade deficit with China and an even more modest impact on the overall U.S. deficit.

Global Banks and Their Internal Capital Markets during the Crisis

Nicola Cetorelli and Linda S. Goldberg

As financial markets have become increasingly globalized, banks have developed growing networks of branches and subsidiaries in foreign countries. This expansion of banking across borders is changing the way banks manage their balance sheets, and the ways home markets and foreign markets respond to disturbances to financial markets. Based on our recent research, this post shows how global banks used their foreign affiliates for accessing scarce dollars during the financial crisis—a liquidity strategy that helped transmit shocks internationally while reducing some of the consequences in the stressed locations.

Historical Echoes: One Giant Step for Banking

New York Fed Research Library

“Lamar Pioneers in Space, the New Frontier” is the headline of an advertisement that appeared in the April 1985 issue of Texas Monthly magazine. The ad indicates that Texas-chartered savings and loan “Lamar Savings now is making plans for a full service branch on the moon.”