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25 posts on "Fiscal Policy"

August 08, 2016

Restoring Economic Growth in Puerto Rico: Introduction to the Series



LSE_Restoring Economic Growth in Puerto Rico: Introduction to the Series


The difficult economic and financial issues facing the Commonwealth of Puerto Rico have remained very much in the news since our post on options for addressing its fiscal problems appeared last fall. That post was itself a follow-up on a series of analyses, starting with a 2012 report that detailed the economic challenges facing the Commonwealth. In 2014, we extended that analysis with an update where we focused more closely on the fiscal challenges facing the Island. As the problems deepened, we have continued to examine important related subjects ranging from positive revisions in employment data, to the credit conditions faced by small businesses, to understanding emigration, and to considering how the Commonwealth’s public debts stack up. In most of this work, we have focused on how policymakers could help to address the immediate issues facing the Island and its people. The U.S. Congress and the Obama Administration took action in June to provide a framework to help address Puerto Rico’s fiscal crisis. But much remains to be done to address these ongoing problems, which represent a significant impediment to economic growth in the short run. It also seems important to revisit the question of the prospects for reviving longer-run growth in the Commonwealth. These concerns were underscored by projections published by the International Monetary Fund (IMF) in the April edition of the World Economic Outlook that forecast Puerto Rico’s real GDP and population to decline through 2021.

Continue reading "Restoring Economic Growth in Puerto Rico: Introduction to the Series" »

July 18, 2016

Forecasting Interest Rates over the Long Run



LSE_Forecasting Interest Rates over the Long Run

In a previous post, we showed how market rates on U.S. Treasuries violate the expectations hypothesis because of time-varying risk premia. In this post, we provide evidence that term structure models have outperformed direct market-based measures in forecasting interest rates. This suggests that term structure models can play a role in long-run planning for public policy objectives such as assessing the viability of Social Security.

Continue reading "Forecasting Interest Rates over the Long Run" »

July 08, 2016

Hey, Economist! Why—and When—Did the Treasury Embrace Regular and Predictable Issuance?



LSE_Why—and When—Did the Treasury Embrace Regular and Predictable Issuance?

Few people know the Treasury market from as many angles as Ken Garbade, a senior vice president in the Money and Payments Studies area of the New York Fed’s Research Group. Ken taught financial markets at NYU’s graduate school of business for many years before heading to Wall Street to assume a position in the research department of the primary dealer division of Bankers Trust Company. At Bankers, Ken conducted relative-value research on the Treasury market, assessing how return varies relative to risk for particular Treasury securities. For a time, he also traded single-payment Treasury obligations known as STRIPS—although not especially successfully, he notes.

Continue reading "Hey, Economist! Why—and When—Did the Treasury Embrace Regular and Predictable Issuance?" »

June 22, 2016

The Rapidly Changing Nature of Japan’s Public Debt



LSE_The Rapidly Changing Nature of Japan’s Public Debt

Japan’s general government debt-to-GDP ratio is the highest of advanced economies, due in part to increased spending on social services for an aging population and a level of nominal GDP that has not increased for two decades. The interest rate payments from taxpayers on this debt are moderated by income earned on government assets and by low interest rates. One might think that the Bank of Japan’s purchases of government bonds would further ease the burden on taxpayers, with interest payments to the Bank of Japan on its bond holdings rebated back to the government. Merging the balance sheets of the government and the Bank, however, shows that the asset purchase program alters the composition of public debt, with reserves in the banking system replacing government bonds, but not the amount of the debt taxpayers must pay interest on.

Continue reading "The Rapidly Changing Nature of Japan’s Public Debt" »

Posted by Blog Author at 7:00 AM in Fiscal Policy, Monetary Policy | Permalink | Comments (6)

November 03, 2015

Some Options for Addressing Puerto Rico’s Fiscal Problems



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Puerto Rico’s economic and fiscal challenges have been an important focus of work done here at the New York Fed, resulting in two reports (2012 and 2014), several blog posts and one paper in our Current Issues series in just the last few years. As the Commonwealth’s problems have deepened, the Obama administration and Congress have begun discussing potential approaches to addressing them. In this post, we update our previous estimates of Puerto Rico’s outstanding debt and discuss the effect that various forms of bankruptcy protection might have on the Commonwealth.

Continue reading "Some Options for Addressing Puerto Rico’s Fiscal Problems" »

Posted by Blog Author at 12:00 PM in Fiscal Policy, Puerto Rico, Regional Analysis | Permalink | Comments (2)

August 31, 2015

Discounting the Long Run



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Expectations about the path of interest rates matter for many economic decisions. Three sources for obtaining information about such expectations are available. The first is extrapolation from historical data. The second consists of surveys of expectations. The third are expectations drawn from financial market prices, often referred to as market expectations. The last are usually considered to be model-based expectations, because, generally, a model is needed to reliably extract expectations from current prices. In this post, we explain the need for and usage of term structure models for extracting far in the future interest rate expectations from market rates, which can be used to discount the long run. We will illustrate our arguments by discussing the measurement of long-run discount rates for Social Security.


Continue reading "Discounting the Long Run" »

Posted by Blog Author at 7:00 AM in Financial Markets, Fiscal Policy, Household Finance | Permalink | Comments (1)

May 07, 2015

From the Vault: Monetary Policy and Government Finances



Each year, the manager of the Federal Reserve’s System Open Market Account (SOMA) submits an accounting of open market operations and other developments influencing the composition and performance of the Fed’s balance sheet to the Federal Open Market Committee (FOMC).

Continue reading "From the Vault: Monetary Policy and Government Finances" »

Posted by Blog Author at 7:00 AM in Fiscal Policy | Permalink | Comments (0)

April 17, 2015

At the New York Fed: Chapter 9 and Alternatives for Distressed Municipalities and States



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On Tuesday, April 14, the Federal Reserve Bank of New York hosted an all-day workshop entitled Chapter 9 and Alternatives for Distressed Municipalities and States. The workshop was jointly organized and sponsored by the Volcker Alliance and George Mason University’s State and Local Government Leadership Center. The event brought together key experts, practitioners, and researchers on the subject of fiscal distress at the state and local level. The aim of the session was to foster discussion on the role of Chapter 9 of the U.S. Bankruptcy Code, alternatives for distressed governments, and strategies to avoid stress and achieve good fiscal outcomes.

Continue reading "At the New York Fed: Chapter 9 and Alternatives for Distressed Municipalities and States" »

Posted by Blog Author at 7:00 AM in Fiscal Policy, Regional Analysis | Permalink | Comments (0)

April 01, 2015

Central Bank Solvency and Inflation



The monetary base in the United States, defined as currency plus bank reserves, grew from about $800 billion in 2008 to $2 trillion in 2012, and to roughly $4 trillion at the end of 2014 (see chart below). Some commentators have viewed this increase in the monetary base as a sure harbinger of inflation. For example, one economist wrote that this “unprecedented expansion of the money supply could make the '70s look benign.” These predictions of inflation rest on the monetarist argument that nominal income is proportional to the money supply. The fact that the money supply has expanded rapidly while real income has grown very modestly means that sooner or later prices will have to catch up. Most academic economists (from Cochrane to Krugman and Mankiw) disagree. The monetarist argument arguably applies only to non-interest-bearing central bank liabilities, but since October 2008 a large fraction of the monetary base has consisted of reserves that pay interest (the so-called IOER, or interest on excess reserves) and one linchpin of the Fed’s “policy normalization principles” consists precisely in raising the IOER along with the federal funds rate. Since reserves pay close to market interest rates, they are close substitutes for other short-term assets such as Treasury bills from a bank’s perspective. As long as the central bank can affect the return on these short-term assets by adjusting the IOER, controlling inflation with a large balance sheet seems no different than it was before the Great Recession.

Continue reading "Central Bank Solvency and Inflation" »

Posted by Blog Author at 8:38 AM in Fiscal Policy, Macroecon, Monetary Policy | Permalink | Comments (1)

August 13, 2014

Why Didn’t Inflation Collapse in the Great Recession?



GDP contracted 4 percent from 2008:Q2 to 2009:Q2, and the unemployment rate peaked at 10 percent in October 2010. Traditional backward-looking Phillips curve models of inflation, which relate inflation to measures of “slack” in activity and past measures of inflation, would have predicted a substantial drop in inflation. However, core inflation declined by only one percentage point, from 2.2 percent in 2007 to 1.2 percent in 2009, giving rise to the “missing deflation” puzzle. Based on this evidence, some authors have argued that slack must have been smaller than suggested by indicators such as the unemployment rate or deviations of GDP from its long-run trend. On the contrary, in Monday’s post, we showed that a New Keynesian DSGE model can explain the behavior of inflation in the aftermath of the Great Recession, despite large and persistent output gaps. An implication of this model is that information about the future stance of monetary policy is very important in determining current inflation, in contrast to backward-looking Phillips curve models where all that matters is the current and past stance of policy.

Continue reading "Why Didn’t Inflation Collapse in the Great Recession?" »

Posted by Blog Author at 7:00 AM in Fiscal Policy, Macroecon, Monetary Policy | Permalink | Comments (4)
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