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The financial crisis and its aftermath have spurred calls for bank compensation packages that mitigate risk-taking incentives. In this post, I review some of the issues linking executive compensation and risk and then describe a novel scheme that links executive pay to credit default swap (CDS) spreads. As I will argue, compensation reform that includes risk-based measures can be effective and efficient in addressing policy concerns about excessive risk taking.
Over the past two decades, state and federal education policies have tried to hold schools more accountable for educating their students. A common criticism of these policies is that they may induce schools to “game the system” with strategies such as excluding certain types of students from computation of school average test scores. In this post, based on our recent New York Fed staff report, “Vouchers, Responses, and the Test Taking Population: Regression Discontinuity Evidence from Florida,” we investigate whether Florida schools resorted to such strategic behavior in response to a voucher program. We find some evidence that Florida’s schools strategically reclassified weak students into exempt categories, and we draw some lessons that are applicable to New York City’s education policies.
Since the launch of the Liberty Street Economics blog in March 2011, our economists have published more than eighty-five posts on a range of issues such as financial sector reform, the global role of the dollar, the federal debt ceiling, and the U.S.-China trade imbalance. The reception we’ve received from our readers suggests that the blog is a success. We’re pleased to see a wide range of visitors read, comment on, and share our work—even when it’s delivered occasionally with a “wonk alert.”
Experience shows that what happens is always the thing against which one has not made provision in advance.
-- John Maynard Keynes1
Our best plan is to plan for constant change and the potential for instability, and to recognize that the threats will constantly be changing in ways we cannot predict or fully understand.
-- Timothy Geithner2
The economics profession has been appropriately criticized for its failure to forecast the large fall in U.S. house prices and the subsequent propagation first into an unprecedented financial crisis and then into the Great Recession. In this post, I examine the performance of the forecasts produced by the economic research staff of the Federal Reserve Bank of New York (New York Fed) over the period 2007-10 and consider some of the reasons why we, like most private sector forecasters, failed to predict the Great Recession. This spreadsheet contains staff forecasts, the outcomes, and a standard measure of private sector forecasts—the Blue Chip consensus. In addition, staff material prepared for bi-annual meetings of the New York Fed Economic Advisory Panel provide some further insights into the evolution of the staff outlook.
The credit default swap (CDS) market has grown rapidly since the asset class was developed in the 1990s. In recent years, and especially since the onset of the financial crisis, policymakers both in the United States and abroad have begun to strengthen regulations governing derivatives trading, with a particular focus on the decentralized and opaque nature of current trading arrangements. For example, the Dodd-Frank Act will require U.S.-based market participants to publicly report details of their CDS trades. In this post, we discuss the possible impact of increased transparency in the CDS market, based on our recent analysis of new and detailed data on the trading activity of major dealers. (See also new video coverage of our findings.)
Over recent decades, the U.S. workforce has undergone a dramatic restructuring in response to changes in technology, trade, and consumption patterns. Some sectors, such as health care, have expanded, while others, such as manufacturing, have contracted. These changes have altered the composition of the workforce, leading to a phenomenon often referred to as “job polarization,” an important factor contributing to economic inequality in the nation. In this post, we show that the wage gap between high- and low-paid occupations has widened over the past three decades. Further, we show that the share of jobs in both high- and low-paying occupations has grown, leaving a shrinking middle.
We know what a bank looks like: It’s typically of solid construction with classical architectural features. The architecture is not merely about aesthetics, of course; banks are designed to convey strength, stability, and security to would-be depositors. A concise history of bank architecture can be found under the heading “Bank Design in the Twentieth Century,” pages 3-4 of the Landmarks Preservation Commission’s report for the Jamaica Savings Bank, Elmhurst Branch. (Ironically, Jamaica Savings Bank looks nothing like a typical bank!)
Economists often talk about nominal interest rates having a “zero lower bound,” meaning they should not be expected to fall below zero. While there have been episodes—both historical and recent—in which some market interest rates became negative, these episodes have been fairly isolated. In this post, I explain why negative interest rates are possible in principle, but rare in practice. Financial markets are generally designed to operate under positive interest rates, and might experience significant disruptions if rates became negative. To avoid such disruptions, policymakers tend to keep short-term interest rates above zero even when trying to loosen monetary policy in other dimensions. These policy choices are the source of the zero lower bound.
It’s hardly news that Congress sets a statutory limit on aggregate Treasury indebtedness. Since Congress controls the appropriations and tax code that largely determine deficits, some commentators have questioned the need for limiting indebtedness as well. Interestingly, the current regime was not put in place “on purpose,” to solve a problem that stemmed from a regime of no limits, but rather evolved out of a system of very different, and much more stringent, limits on individual categories of debt. This post describes the nature of the earlier limits and how they evolved to the current regime of a single limit on aggregate indebtedness.
A few months ago, the federal government was once again confronted with the need to raise the statutory limit on the amount of debt issued by the Treasury. As in the past, the protracted stalemate and associated uncertainty led to calls to eliminate the debt ceiling. In this post, I make the counterargument. Likely because of its straightforwardness, the debt ceiling has been an effective “fiscal rule.” The reduction of the federal deficit from the mid-1980s to the mid-1990s was due in large part to a series of budget compromises, all of which were accompanied by the need to raise the debt ceiling.
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