Liberty Street Economics
September 22, 2015

Do Better Bank Services Have a Hidden Cost?


You walk into a bank branch, check in hand. You find yourself in a well-lit space with modern furnishings, and you help yourself to a cup of freshly brewed coffee, courtesy of the bank. Neatly dressed assistants in uniform stand in a row, ready to attend to customers at a moment’s notice, and in fact, one of them approaches you to help you deposit your check. Having finished your business, you leave feeling reassured that such a customer-oriented organization is diligently tending to your hard-earned money. But what could possibly be missing?

Posted by Blog Author at 7:00 AM in Financial Institutions | Permalink | Comments ( 3 )

September 21, 2015

Are BHCs Mimicking the Fed’s Stress Test Results?


In March, the Federal Reserve and thirty-one large bank holding companies (BHCs) disclosed their annual Dodd-Frank Act stress test (DFAST) results. This is the third year in which both the BHCs and the Fed have published their projections. In a previous post, we looked at whether the Fed’s and the BHCs’ stress test results are converging in the aggregate and found mixed results. In this post, we look at stress test projections made by individual BHCs. If the Fed’s projections are very different from a BHC’s in one year, do the BHC projections change in the following year to close this gap? Or are year-to-year changes in BHC stress test projections driven more by changes in underlying risk factors? Evidence of BHCs mimicking the Fed would be problematic if it meant that the BHCs are not really independently modelling their own risks. Convergence poses a potential risk to the financial system, since a financial system with monoculture in risk measurement models could be less stable than one in which firms use diverse models that collectively might be more likely to identify emerging risks.

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

September 04, 2015

From the Vault: Understanding Puerto Rico’s Economic Challenges


Recent news examining the toll that a decade of stagnation, out-migration, and heavy debt has taken on Puerto Rico draws on work summarized in two Liberty Street Economics posts. For example, the New York Times cited our analysis of the U.S. Commonwealth’s ongoing population decline. In an April post, economists Jaison Abel and Richard Deitz put numbers on the exodus, reporting that over the last ten years, Puerto Rico’s population has dwindled to 3.6 million, a decline of more than 5 percent, which they attribute in part to falling birthrates but mostly to migration to the U.S. mainland.

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

September 02, 2015

Searching for Higher Wages

Since the peak of the recession, the unemployment rate has fallen by almost 5 percentage points, and observers continue to focus on whether and when this decline will lead to robust wage growth. Typically, in the wake of such a decline, real wages grow since there is more competition for workers among potential employers. While this relationship has historically been quite informative, real wage growth more recently has not been commensurate with observed declines in the unemployment rate.

Posted by Blog Author at 7:00 AM in Labor Economics | Permalink | Comments ( 3 )

September 01, 2015

A Distributed Version of Repugnance as a Constraint on Markets

The 2012 Nobel Prize in economics was awarded to Alvin E. Roth and Lloyd S. Shapley for their work on matching problems. Two-sided matching problems, like assigning jobs to workers or dorm rooms to students, can be complicated enough. But sometimes the matching problem can be even more difficult. It may be that an item supplied by Alice is useful to Bob, but Bob has nothing of value to give to Alice. If, however, the item supplied by Bob is valuable to Charlie, then there is the potential for a matching chain. Charlie gives something to Alice, Alice gives something to Bob, and Bob gives something to Charlie. Such chains can by themselves be very complicated, and work must be done to identify chains that provide the most benefit. The first Nobel laureate mentioned above has done considerable work designing matching mechanisms used in kidney exchange. But why is all of this necessary? Why isn’t there simply a market with prices?

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

August 31, 2015

Discounting the Long Run


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.

August 28, 2015

Historical Echoes: How Members of the Society for Creative Anachronism Make Money

Have you seen these people? You might come upon them wearing historic period garb. The Society for Creative Anachronism (SCA), founded in 1966, is, according to its website, “an international organization dedicated to researching and re-creating the arts and skills of pre-17th-century Europe.”  The members like to recreate life in an earlier time, which means using the technology existing at that time and eschewing later technology (not all the time, just when they are in “anachronism mode”).

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

Entry and Exit Leads to Zero Profit for Bitcoin Miners


In a previous post, we discussed bitcoin miners’ incentives to undertake a 51 percent attack given the current condition of the bitcoin market. We also speculated that high profits and free entry would cause more miners to enter the market, driving marginal mining profits to zero in the long run. Since then, the price of a bitcoin has declined over 40 percent and both the hash rate and the difficulty level of the bitcoin mining problem, which adjusts automatically to changes in the hash rate, appear to have leveled off. Our most recent calculations suggest the long run may have arrived.

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

August 27, 2015

From the Vault: Supplementing a Monetary Policy Syllabus


The San Francisco Fed’s John Williams gave an interesting speech awhile back on the challenge of teaching economics after the financial crisis, since the Federal Reserve had deployed new monetary policy and lending tools that “were not found in any textbook.”

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

August 26, 2015

Just Released: An Update on Regional Economic Conditions Provided at Our Economic Press Briefing

Today’s Economic Press Briefing at the New York Fed presented our economic outlook for New York, Northern New Jersey, and Puerto Rico. We showed that many parts of the region have bounced back quite well from the Great Recession and are growing at a solid clip, including New York City, Buffalo, and Albany. The picture is a bit different in other parts of the region, though. In both Northern New Jersey and the Lower Hudson Valley, employment has been growing steadily, but jobs are still not back to their pre-recession peak. And there are also pockets of significant weakness, such as Binghamton, Puerto Rico, and the U.S. Virgin Islands, which have yet to show any meaningful signs of recovery.

Posted by Blog Author at 10:00 AM in Regional Analysis | Permalink | Comments ( 0 )

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