In this post we summarize the main results of our contribution to a recent e-book, “The Making of the European Monetary Union: 30 years since the ERM crisis,” on the economic and financial crises in Europe since 1992-93, and focus on the spillovers of those crises onto the United States and the global economy. We find that the answer to the question in the title of this post is a (moderate) yes.
We continue our series on military service and consider veterans’ earnings and labor market outcomes. We find that veterans earn more than 12 percent less and are 4 percentage points (18 percent) more likely to be out of the labor force than comparable nonveterans. Interestingly, accounting for veterans’ differences from comparable nonveterans in terms of education and disability status largely explains these labor market differences.
Veterans are an understudied group that forms an important part of the fabric of American society and that constitutes a significant segment of the population. In the first post of this two-part series, we will investigate how the outcomes of veteran men–in educational attainment, health, and housing–differ from those of comparable men who did not serve in the military. Looking only at men, for reasons described below, we find that relative to nonveteran men with a high school degree and a similar distribution of demographic and geographic characteristics, veterans are 7 percentage points less likely to have a college degree and are over 50 percent more likely to experience a disability. Veterans are also somewhat likelier to rent a home than to own and, as renters, pay a lower average rent, suggesting they experience lower quality housing or live in worse neighborhoods.
Comparing our financial stability real interest rate, r** (“r-double-star”) with the prevailing real interest rate gives a measure of how vulnerable the economy is to financial instability. In this post, we first explain how r** can be measured, and then discuss its evolution over the last fifty years and how to interpret the recent banking turmoil within this framework.
In a recent research paper we argue that interest rates have very different consequences for current versus future financial stability. In the short run, lower real rates mean higher asset prices and hence higher net worth for financial institutions. In the long run, lower real rates lead intermediaries to shift their portfolios toward risky assets, making them more vulnerable over time. In this post, we use a model to highlight the challenging trade-offs faced by policymakers in setting interest rates.
What is the effect of a hike in interest rates on the economy? Building on recent research, we argue in this post that the answer to this question very much depends on how vulnerable the financial system is. We measure financial vulnerability using a novel concept—the financial stability interest rate r** (or “r-double-star”)—and show that, empirically, the economy is more sensitive to shocks when the gap between r** and current real rates is small or negative.
Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. In this post, which is based on a recent staff report, we discuss two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds (MMFs) in the ON RRP facility.
The timely characterization of risks to the economic outlook plays an important role in both economic policy and private sector decisions. In a February 2023 Liberty Street Economics post, we introduced the concept of “Outlook-at-Risk”—that is, the downside risk to real activity and two-sided risks to inflation. Today we are launching Outlook-at-Risk as a regularly updated data product, with new readings for the conditional distributions of real GDP growth, the unemployment rate, and inflation to be published each month. In this post, we use the data on conditional distributions to investigate how two-sided risks to inflation and downside risks to real activity have evolved over the current and previous five monetary policy tightening cycles.
Total debt balances grew by $148 billion in the first quarter of 2023, a modest increase after 2022’s record growth. Mortgages, the largest form of household debt, grew by only $121 billion, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. The increase was tempered by a sharp reduction in both purchase and refinance mortgage originations. The pandemic boom in purchase originations was driven by many factors – low mortgage rates, strong household balance sheets, and an increased demand for housing. Homeowners who refinanced in 2020 and 2021 benefitted from historically low interest rates and will be enjoying low financing costs for decades to come. These “rate refinance” borrowers have lowered their monthly mortgage payments, improving their cash flow, while other “cash-out” borrowers extracted equity from their real estate assets, making more cash available for consumption. Here, we explore the refi boom of 2020-21–who refinanced, who took out cash, and how much potential consumption support these transactions provided. In this analysis, as well as the Quarterly Report, we use our Consumer Credit Panel (CCP), which is based on anonymized credit reports from Equifax.
In May 2022, Sam Khater—chief economist for Freddie Mac—argued that a surge in first-time buyers had been an important driver of the housing market the previous year. In contrast, using data from the New York Fed Consumer Credit Panel, we find that the share of home purchases by first-time buyers fell in 2021. This suggests that other factors were important to the rapid increase in house prices in 2021.