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16 posts on "Fiscal Policy"

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)

June 23, 2014

The Capitol Since the Nineteenth Century: Political Polarization and Income Inequality in the United States

Rajashri Chakrabarti and Matt Mazewski

Even the most casual observer of American politics knows that today’s Republican and Democratic parties seem to disagree with one another on just about every issue under the sun. Some assume that this divide is merely an inevitable feature of a two-party system, while others reminisce about a golden era of bipartisan cooperation and hold out hope that a spirit of compromise might one day return to Washington. In this post, we present evidence that political polarization—or the trend toward more ideologically distinct and internally homogeneous parties—is not a recent development in the United States, although it has reached unprecedented levels in the last several years. We also show that polarization is strongly correlated with the extent of income inequality, but only weakly associated with the rate of economic growth. We offer several tentative explanations for these relationships, and discuss whether all forms of polarization are created equal.

Continue reading "The Capitol Since the Nineteenth Century: Political Polarization and Income Inequality in the United States" »

Posted by Blog Author at 7:00 AM in Fiscal Policy, Macroecon | Permalink | Comments (2)

August 16, 2013

Transparency and Sources of Information on the Federal Reserve’s Operations, Income, and Balance Sheet

Michael Fleming and Deborah Leonard

This week-long series examined the evolution of the Federal Reserve’s securities portfolio and its performance over time. While the intent has been to enhance understanding of the Fed’s activities, the Federal Reserve has long maintained a commitment to transparency and accountability. The historical information presented in these posts represents the work of New York Fed staff to collect portfolio-related information from annual statements and reports, most of which are public. To enhance public access, the resulting time series we compiled are being provided in downloadable Excel files accompanying each post. In this last post of the series, we review sources of information on the Fed’s operations, income, and balance sheet.

Continue reading "Transparency and Sources of Information on the Federal Reserve’s Operations, Income, and Balance Sheet" »

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

August 15, 2013

More Than Meets the Eye: Some Fiscal Implications of Monetary Policy

Marco Del Negro, Jamie McAndrews, and Julie Remache

In 2012, the Fed’s remittances to the U.S. Treasury amounted to $88.4 billion. The vast majority of these remittances originated as income from the SOMA portfolio (see the second post in this series for an account of the history of SOMA income). While net income has been high in recent years because of the Fed’s large balance sheet, it is likely to drop in the future as the Fed normalizes interest rates. This is because the Fed will likely face increased interest expense on its reserve balances and possibly realize losses in the case of asset sales. A recent paper by economists at the Board of Governors of the Federal Reserve System (Carpenter et al.) shows that under some scenarios the Fed may be forced to decrease its remittances to zero for a few years (see also the related work by Hall and Reis and by Greenlaw, Hamilton, Hooper, and Mishkin). The fact that remittances may vary more over the next few years than they have in the past has highlighted the fact that monetary policy has fiscal implications.

Continue reading "More Than Meets the Eye: Some Fiscal Implications of Monetary Policy" »

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

August 14, 2013

What If? A Counterfactual SOMA Portfolio

Michael Fleming, Deborah Leonard, Grant Long, and Julie Remache

The Federal Open Market Committee (FOMC) has actively used changes in the size and composition of the System Open Market Account (SOMA) portfolio to implement monetary policy in recent years. These actions have been intended to promote the Committee’s mandate to foster maximum employment and price stability but, as discussed in a prior post, have also generated high levels of portfolio income, contributing in turn to elevated remittances to the U.S. Treasury. In the future, as the accommodative stance of monetary policy is eventually normalized, net portfolio income is likely to decline from these high levels and may dip below pre-crisis averages for a time, potentially contributing to a suspension in remittances (Carpenter et al. 2013). But what would the path of the portfolio and income look like had these unconventional balance sheet actions not been taken? In this post, we conduct a counterfactual exercise to explore such a scenario.

Continue reading "What If? A Counterfactual SOMA Portfolio" »

Posted by Blog Author at 7:00 AM in Fiscal Policy | Permalink | Comments (1)

August 13, 2013

A History of SOMA Income

Meryam Bukhari, Alyssa Cambron, Marco Del Negro, and Julie Remache

Note: On August 15, 2013, the data files associated with this post and with the post “The SOMA Portfolio through Time” were expanded to include historical data in nominal dollars. In addition, the estimated value for 1996 in the chart “Total Portfolio Unrealized Gains and Losses” was revised and the associated data file was updated.

Historically, the Federal Reserve has held mostly interest-bearing securities on the asset side of its balance sheet and, up until 2008, mostly currency on its liability side, on which it pays no interest. Such a balance sheet naturally generates income, which is almost entirely remitted to the U.S. Treasury once operating expenses and statutory dividends on capital are paid and sufficient earnings are retained to equate surplus capital to capital paid in. The financial crisis that began in late 2007 prompted a number of changes to the balance sheet. First, the asset side of the balance sheet increased dramatically, a result of both the various liquidity facilities and the Large-Scale Asset Purchase programs (LSAPs) (see yesterday's post on the history of the Fed’s balance sheet). Second, this expansion of the balance sheet was financed in large part by issuing interest-bearing reserves instead of additional noninterest-bearing currency. As a consequence of these changes, future net income from the Fed’s portfolio will depend on a wider range of factors and may be more variable for a period of time—a topic that has generated increased discussion (see papers by Carpenter et al., Hall and Reis, and Greenlaw, Hamilton, Hooper, and Mishkin).

Continue reading "A History of SOMA Income" »

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

August 12, 2013

The SOMA Portfolio through Time

Meryam Bukhari, Alyssa Cambron, Michael Fleming, Jonathan McCarthy, and Julie Remache

The System Open Market Account (SOMA) is a portfolio held by the Federal Reserve to support monetary policy implementation and reflects assets and liabilities (domestic, and some foreign) acquired through open market operations. The SOMA has attracted greater attention in recent years as, with the federal funds rate near its lower bound, the size and composition of the domestic portfolio has been used as an active monetary policy instrument. Earnings on the SOMA portfolio represent a significant amount of the Fed’s income and, given the substantial increase in the size of the portfolio and shift in its composition, income has increased notably, with remittances to the Treasury totaling $88.4 billion in 2012.

Continue reading "The SOMA Portfolio through Time" »

Posted by Blog Author at 7:00 AM in Fiscal Policy | Permalink | Comments (2)

May 15, 2013

My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike?

Basit Zafar, Max Livingston, and Wilbert van der Klaauw

The payroll tax cut, which was in place during all of 2011 and 2012, reduced Social Security and Medicare taxes withheld from workers’ paychecks by 2 percent. This tax cut affected nearly 155 million workers in the United States, and put an additional $1,000 a year in the pocket of an average household earning $50,000. As part of the “fiscal cliff” negotiations, Congress allowed the 2011-12 payroll tax cut to expire at the end of 2012, and the higher income that workers had grown accustomed to was gone. In this post, we explore the implications of the payroll tax increase for U.S. workers.

Continue reading "My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike?" »

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

March 06, 2013

Pick Your Poison: How Money Market Funds Reacted to Financial Stress in 2011

Neel Krishnan, Antoine Martin, and Asani Sarkar

The summer of 2011 was an unsettling period for financial markets. In the United States, Congress was unable to agree to terms for raising the debt ceiling until August, creating considerable uncertainty over whether the government would be forced to default on its debt. In Europe, the borrowing costs of some peripheral countries increased dramatically, raising questions about the health of some of the largest banks. In this post, we analyze data recently made public by the Securities and Exchange Commission (SEC) to see how the U.S. money market mutual fund (MMF) industry reacted to these stresses. We conclude that MMFs appeared to be more concerned with the European debt crisis because they increased their holdings of U.S. Treasuries and other government securities while decreasing their holdings of financial securities issued by European banks over that period.

Continue reading "Pick Your Poison: How Money Market Funds Reacted to Financial Stress in 2011" »

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

November 05, 2012

Nudging Inflation Expectations: An Experiment

Basit Zafar, Olivier Armantier, Scott Nelson, Giorgio Topa, and Wilbert van der Klaauw

Managing consumers’ inflation expectations is of critical importance to central banks in the conduct of monetary policy. But managing inflation expectations requires more than just monitoring expectations; it also requires an understanding of how these expectations are formed. In this post, we present results from a new study that investigates how individual consumers use selected information on food prices in forming their inflation expectations. While the provision of this information leads individuals to meaningfully revise expectations of their own-basket inflation rate, we find there is little impact on expectations of overall inflation.

Continue reading "Nudging Inflation Expectations: An Experiment " »

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