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62 posts on "Macroecon"

July 16, 2014

Risk Aversion and the Natural Interest Rate

Bianca De Paoli and Pawel Zabczyk

One way to assess the stance of monetary policy is to assert that there is a natural interest rate (NIR), defined as the rate consistent with output being at its potential. Broadly speaking, monetary policy can be seen as expansionary if the policy rate is below the NIR with the gap between the rates measuring the extent of the policy stimulus. Of course, there are many challenges in defining and measuring the NIR, with various factors driving its value over time. A key factor that needs to be considered is the effect of uncertainty and risk aversion on households’ savings decisions. Households’ tolerance for risk tends to be lower during downturns, putting upward pressure on precautionary savings, and thereby downward pressure on the natural interest rate. In addition, uncertainty dictates how much precautionary savings responds to changes in risk aversion. So policymakers need to be aware that rate moves to offset adverse economic conditions that are appropriate in tranquil times may not be sufficient in times of high uncertainty.

Continue reading "Risk Aversion and the Natural Interest Rate" »

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

July 14, 2014

High Unemployment and Disinflation in the Euro Area Periphery Countries

Thomas Klitgaard and Richard Peck

Economists often model inflation as dependent on inflation expectations and the level of economic slack, with changes in expectations or slack leading to changes in the inflation rate. The global slowdown and the subsequent sovereign debt crisis caused the greatest divergence in unemployment rates among euro area member countries since the monetary union was founded in 1999. The pronounced differences in economic performances of euro area countries since 2008 should have led to significant differences in price behavior. That turned out to be the case, with a strong correlation evident between disinflation and labor market deterioration in euro area countries.

Continue reading "High Unemployment and Disinflation in the Euro Area Periphery Countries" »

Posted by Blog Author at 7:00 AM in International Economics, Macroecon | Permalink | Comments (0)

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)

May 16, 2014

Just Released: The New York Fed Staff Forecast—May 2014

Jonathan McCarthy and Richard Peach

Today, the Federal Reserve Bank of New York (FRBNY) is hosting the spring meeting of its Economic Advisory Panel (EAP). At this meeting, FRBNY staff are presenting their forecast for U.S. growth, inflation, and unemployment through the end of 2015.  Following the presentation, members of the EAP, all of whom are leading economists in academia and the private sector, are asked to critique the staff forecast. Such feedback helps the staff evaluate the assumptions and reasoning underlying their forecast and the key risks to it. Subjecting the staff forecast to periodic evaluation is an important part of the forecasting process; this review informs the staff’s discussions with New York Fed President William Dudley about economic conditions. In the same spirit of inviting feedback, we are sharing a short summary of the staff forecast in this post; for more detail, see the material from the EAP meeting on our website.


Continue reading "Just Released: The New York Fed Staff Forecast—May 2014" »

Posted by Blog Author at 10:30 AM in Macroecon | Permalink | Comments (1)

February 20, 2014

Just Released: The Inflation Outlook in the Euro Zone . . . Survey Says

Robert Rich, Kaivan K. Sattar, and Joseph Tracy

The European Central Bank (ECB) released its 2014:Q1 Survey of Professional Forecasters (SPF) on February 13. The release comes at a time of growing concern about low Euro-zone inflation: consumer prices were up only 0.7 percent over the year in January, the fourth consecutive monthly reading of less than 1 percent and well below the ECB’s target of just below 2 percent. Some commentators have argued that falling inflation after five years of recession or very slow growth has raised the threat of deflation.

Continue reading "Just Released: The Inflation Outlook in the Euro Zone . . . Survey Says" »

Posted by Blog Author at 7:00 AM in International Economics, Macroecon | Permalink | Comments (0)

February 19, 2014

Why Is the Job-Finding Rate Still Low?

Victoria Gregory, Christina Patterson, Ayşegül Şahin, and Giorgio Topa

Fluctuations in unemployment are mostly driven by fluctuations in the job-finding prospects of unemployed workers—except at the onset of recessions, according to various research papers (see, for example, Shimer [2005, 2012] and Elsby, Hobijn, and Sahin [2010]). With job losses back to their pre-recession levels, the job-finding rate is arguably one of the most important indicators to watch. This rate—defined as the fraction of unemployed workers in a given month who find jobs in the consecutive month—provides a good measure of how easy it is to find jobs in the economy. The chart below presents the job-finding rate starting from 1990. Clearly, the job-finding rate is still substantially below its pre-recession levels, suggesting that it is still difficult for the unemployed to find work. In this post, we explore the underlying reasons behind the low job-finding rate.

Continue reading "Why Is the Job-Finding Rate Still Low?" »

Posted by Blog Author at 7:00 AM in Labor Economics, Macroecon | Permalink | Comments (1)

February 18, 2014

Just Released: Does Transportation Spending Make Good Stimulus?

Andrew Haughwout, Therese McGuire, and Joseph Morris

On January 14, the Transportation Research Board, an arm of the National Research Council, released a new report, Transportation Investments in Response to Economic Downturns. The report is intended to provide guidance on three important and related policy questions:

  1. If the federal government undertakes a future stimulus program, should transportation spending be part of that package?
  2. If so, how should the transportation spending be structured and managed?
  3. Should established transportation programs be modified to make transportation spending more useful as economic stimulus?

Continue reading "Just Released: Does Transportation Spending Make Good Stimulus?" »

Posted by Blog Author at 3:00 PM in Macroecon | Permalink | Comments (1)

February 12, 2014

The Long and Short of It: The Impact of Unemployment Duration on Compensation Growth

M. Henry Linder, Richard Peach, and Robert Rich

How tight is the labor market? The unemployment rate is down substantially from its October 2009 peak, but two-thirds of the decline is due to people dropping out of the labor force. In addition, an unusually large share of the unemployed has been out of work for twenty-seven weeks or more—the long-duration unemployed. These statistics suggest that there remains a great deal of slack in U.S. labor markets, which should be putting downward pressure on labor compensation. Instead, compensation growth has moved modestly higher since 2009. A potential explanation is that the long-duration unemployed exert less influence on wages than the short-duration unemployed, a hypothesis we examine here. While preliminary, our findings provide some support for this hypothesis and show that models taking into account unemployment duration produce more accurate forecasts of compensation growth.

Continue reading "The Long and Short of It: The Impact of Unemployment Duration on Compensation Growth " »

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

February 03, 2014

A Mis-Leading Labor Market Indicator

Samuel Kapon and Joseph Tracy

The unemployment rate is a popular measure of the condition of the labor market. With the Great Recession, the unemployment rate increased from a low of 4.4 percent in March 2007 to a peak of 10.0 percent in October 2009. As the economy recovered and growth resumed, the unemployment rate has fallen to 6.7 percent. What other measures are useful to supplement our understanding of the degree of the labor market recovery?

Continue reading "A Mis-Leading Labor Market Indicator" »

Posted by Blog Author at 12:00 PM in Labor Economics, Macroecon | Permalink | Comments (18)

November 27, 2013

Has the Fed Stabilized the Price Level?

Marc P. Giannoni and Hannah Herman

The Federal Reserve Reform Act of 1977 established the monetary policy objectives of maximum employment, stable prices, and moderate long-term interest rates. The goal of “stable prices” has long been understood to mean a low positive inflation rate. On January 25, 2012, the Federal Open Market Committee (FOMC) explicitly defined its price stability mandate in terms of a longer-run goal of 2 percent inflation measured by the total personal consumption expenditure (PCE) deflator. Here, we examine how the behavior of inflation over different time periods compares to this goal. We then discuss how the goal of stabilizing inflation over the long run, rather than on a year-after-year basis, tends to imply a stabilization of the U.S. price level around a trend line—an outcome similar to that from price-level targeting, which offers various theoretical benefits.

Continue reading "Has the Fed Stabilized the Price Level?" »

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