James Orr

An Update on the Competitiveness of Puerto Rico’s Economy, released today, offers six steps that the Island’s government should consider taking to restore its fiscal health. Puerto Rico faces interrelated economic and fiscal challenges. The report characterizes economic activity in Puerto Rico as flat at a depressed level and shows that public debt has risen to about 100 percent of GNP, a high ratio compared with the ratios for U.S. mainland states and a number of foreign economies. Besides the weak economy, the main sources of the debt buildup have been increasing general government deficits; debt incurred by COFINA, a special-purpose bond issuing entity; and rising deficits in a group of public-sector corporations that provide a variety of services on the Island, including electricity, water, and transportation. A series of ratings downgrades eventually pushed the credit ratings on the Island’s debt below investment grade in early 2014, and it has become increasingly evident that fiscal and economic reforms will be needed in order to maintain access to capital markets on a sustainable basis.

Beverly Hirtle, Anna Kovner, and Eric McKay

Stress tests have become an important method of assessing whether financial institutions have enough capital to operate in bad economic conditions. Under the provisions of the Dodd-Frank Act, both the Federal Reserve and large U.S. bank holding companies (BHCs) are required to do annual stress tests and to disclose these results to the public. While the BHCs’ and the Federal Reserve’s projections are made under the same macroeconomic scenario, the results differ, primarily because of differences in the models used to make the projections. In this post, we look at the 2014 stress test projections made by the eighteen largest U.S. BHCs and by the Federal Reserve and compare them to similar numbers from 2013. We are particularly interested in the question of whether the BHCs’ and the Federal Reserve’s results are converging over time, since such convergence could indicate decreased diversity of stress testing approaches in the banking industry.

Megan Cohen

There are many methods by which financial institutions can ready themselves for worst-case scenarios: they participate in the federal deposit insurance system, they follow a variety of banking regulations, and they prepare for natural disasters, for starters. But what about bank robberies, which typically strike their targets with little or no warning?

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.

Jason Bram and Richard Deitz

The July 2014 Empire State Manufacturing Survey, released today, points to some notable strengthening in New York’s manufacturing sector. The survey’s headline general business conditions index and the new orders and shipments indexes all climbed to their highest levels in more than four years. The employment measure also moved up in July and is close to the three-year high set in April. Because the survey’s diffusion indexes measure the breadth of change for their respective indicators, greater values tend to indicate not just higher levels of activity, but also a faster pace of growth, so today’s report is quite encouraging. This month’s Empire Survey suggests a fundamental improvement in New York State’s manufacturing climate that has now persisted for three months—a break from the winter doldrums of February, March, and April, when there were few signs of any growth at all. Some of the improvement over the past few months may reflect a bounce-back from the weak winter, but we are now getting past the point where this is likely to be the predominant factor. This provides a hopeful sign that we may see some of these positive trends reflected in hard data on statewide manufacturing employment, which looked quite weak during the first part of 2014.

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.

James Narron and David Skeie

In the late 1700s, France ran a persistent deficit and by the late 1780s struggled with how to balance the budget and pay down the debt. After heated debate, the National Assembly elected to issue a paper currency bearing an attractive 3 percent interest rate, secured by the finest French real estate to be confiscated from the clergy. Assignats were first issued in December 1789 and initially were a boon to the economy. Yet while the first issues brought prosperity, subsequent issues led to stagnation and misery. In this edition of Crisis Chronicles, we review how fiat money inflation in France caused the collapse of the French assignat (subscription required) and describe some interesting parallels between the politics of French government finance (subscription required) in the late 1700s and more recent fiscal crises.

Richard Deitz and Shira Gans

With more than 35,000 farms and $5.5 billion in annual sales, the agriculture industry is an important part of the New York State economy. New York produces a wide array of agricultural goods, from dairy products (the state has the third largest dairy industry in the country) to fruits and vegetables, livestock, and even fish. It is also a growing industry: agricultural exports, for example, have more than doubled in the state since 2000. And the action isn’t just on farms: agriculture reaches into many other parts of the economy, such as farmers’ markets, food manufacturing and processing firms, restaurants, and agritourism.

     Recognizing that firms that make, process, and sell agricultural products play an important role in the state’s economy, the Regional and Community Outreach team at the New York Fed recently held a conference for N.Y. food and beverage firms on accessing capital, co-sponsored by Empire State Development and the New York State Department of Agriculture and Markets. The goal of the event, which was held on June 24, was to provide information about the wide array of financing available for these firms, and to help them decide which types of financing would best suit their credit needs. The conference also highlighted opportunities in international markets, and identified financing tools available to assist firms with exporting their goods abroad.

Adam Copeland, Isaac Davis, Eric LeSueur, and Antoine Martin

Correction: This post was updated on December 10, 2014, to correct the bilateral repo estimates in the table and charts. We also corrected the text explaining the method to construct the bilateral repo estimates.

The repurchase agreement (repo), a contract that closely resembles a collateralized loan, is widely used by financial institutions to lend to each other. The repo market is divided into trades that settle on the books of the two large clearing banks (that is, tri-party repo) and trades that do not (that is, bilateral repo). While there are public data about the tri-party repo segment, there is little to no information on the bilateral repo segment. In this post, we update a methodology we developed earlier to estimate the size and composition of collateral posted for bilateral repos, and find that U.S. Treasury securities are the dominant form of collateral for bilateral repos. This new finding implies that the collateral posted for bilateral repos is of higher quality than the collateral posted for tri-party repos.

Mary Amiti, Oleg Itskhoki, and Jozef Konings

The Japanese yen depreciated 30 percent from its peak in the fourth quarter of 2011 against its trading partners. This was expected to boost its exports as the lower yen makes Japanese goods more competitive on global markets. Instead, the volume of Japanese exports of goods actually fell by 0.6 percent over this same period, as can be seen in the chart below. Weaker external demand surely contributed to this poor export performance. Yet over the same period, U.S. goods exports grew by more than 6 percent, which suggests that other factors are also at play. In this post, we draw on our recent paper “Importers, Exporters, and Exchange Rate Disconnect” that highlights another channel to help explain these puzzling developments. In that study, we show that a key to understanding why there is low pass-through from exchange rates into export prices is that large exporters are also large importers, so they face offsetting exchange rate effects on their marginal costs. In the case of Japan, the connection between the yen and production costs has been made stronger since the country replaced nuclear power with imported fuels in the aftermath of the 2011 earthquake.