Liberty Street Economics

August 9, 2023

The Post‑Pandemic r*

Katie Baker, Logan Casey, Marco Del Negro, Aidan Gleich, and Ramya Nallamotu

Decorative: U.S. dollars and surgical masks in a still life.

The debate about the natural rate of interest, or r*, sometimes overlooks the point that there is an entire term structure of r* measures, with short-run estimates capturing current economic conditions and long-run estimates capturing more secular factors. The whole term structure of r* matters for policy: shorter run measures are relevant for gauging how restrictive or expansionary current policy is, while longer run measures are relevant when assessing terminal rates. This two-post series covers the evolution of both in the aftermath of the pandemic, with today’s post focusing especially on long-run measures and tomorrow’s post on short-run r*.

Posted at 7:00 am in DSGE, Forecasting, Pandemic | Permalink | Comments (1)

August 8, 2023

Credit Card Markets Head Back to Normal after Pandemic Pause

Andrew Haughwout, Donghoon Lee, Daniel Mangrum, Joelle Scally, and Wilbert van der Klaauw

Decorative photo: man's hand pulling out a yellow credit card from a wallet with several other credit cards.

Total household debt balances increased by $16 billion in the second quarter of 2023, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data. This reflects a modest rise from the first quarter. Credit card balances saw the largest increase of all debt types—$45 billion—and now stand at $1.03 trillion, surpassing $1 trillion in nominal terms for the first time in the series history. After a sharp contraction in the first year of the pandemic, credit card balances have seen seven quarters of year-over-year growth. The second quarter of 2023 saw a brisk 16.2 percent increase from the previous year, continuing this strong trend. With credit card balances at historic highs, we consider how lending and repayment have evolved using the New York Fed’s Consumer Credit Panel (CCP), which is based on anonymized Equifax credit report data.

Posted at 11:00 am in Household Finance | Permalink | Comments (2)

August 2, 2023

Why Do Forecasters Disagree about Their Monetary Policy Expectations?

Arunima Sinha, Giorgio Topa, and Francisco Torralba

Decorative: woman dressed in red standing in the center of four arrows painted on a green asphalt pointing in four different directions, i.e., north, east, south and west.

While forecasters generally disagree about the expected path of monetary policy, the level of disagreement as measured in the New York Fed’s Survey of Primary Dealers (SPD) has increased substantially since 2022. For instance, the dispersion of expectations about the future path of the target federal funds rate (FFR) has widened significantly. What explains the current elevated disagreement in FFR forecasts?

Posted at 7:00 am in Expectations, Monetary Policy | Permalink | Comments (1)

July 13, 2023

Inflating Away the Debt: The Debt‑Inflation Channel of German Hyperinflation

Markus Brunnermeier, Sergio Correia, Stephan Luck, Emil Verner, and Tom Zimmermann

Photo: In the money delivery office of the Reichsbank in Berlin: table full of money notes with men looking over. Sign says Rauchen verboten, October 1923; source: Wikimedia.

The recent rise in price pressures around the world has reignited interest in understanding how inflation transmits to the real economy. Economists have long recognized that unexpected surges of inflation can redistribute wealth from creditors to debtors when debt contracts are written in nominal terms (see, for example, Fisher 1933). If debtors are financially constrained, this redistribution can affect real economic activity by relaxing financing constraints. This mechanism, which we call the debt-inflation channel, is well understood theoretically (for example, Gomes, Jermann, and Schmid 2016), but there is limited empirical evidence to substantiate it. In this post, we discuss new insights from one of the key events in monetary history: the Great German Inflation of 1919-23. Because this case of inflation was both surprising and extremely high, Germany’s experience helps shed light on how high inflation impacts firms’ economic activity through the erosion of their nominal debt burdens. These insights are based on a recently released research paper.

Posted at 7:00 am in Economic History, Inflation, Macroeconomics | Permalink

July 12, 2023

Runs on Stablecoins

Kenechukwu Anadu, Pablo D. Azar, Marco Cipriani, Thomas Eisenbach, Catherine Huang, Mattia Landoni, Gabriele La Spada, Marco Macchiavelli, Antoine Malfroy-Camine, and J. Christina Wang

Decorative image; list of bitcoins with chart overlay

Stablecoins are digital assets whose value is pegged to that of fiat currencies, usually the U.S. dollar, with a typical exchange rate of one dollar per unit. Their market capitalization has grown exponentially over the last couple of years, from $5 billion in 2019 to around $180 billion in 2022. Notwithstanding their name, however, stablecoins can be very unstable: between May 1 and May 16, 2022, there was a run on stablecoins, with their circulation decreasing by 15.58 billion and their market capitalization dropping by $25.63 billion (see charts below.) In this post, we describe the different types of stablecoins and how they keep their peg, compare them with money market funds—a similar but much older and more regulated financial product, and discuss the stablecoin run of May 2022.

Posted at 7:00 am in Cryptocurrencies, Financial Markets, Liquidity | Permalink

July 10, 2023

How Exposed Are U.S. Banks’ Loan Portfolios to Climate Transition Risks?

Hyeyoon Jung, João A.C. Santos, and Lee Seltzer

Much of the work on climate risk has focused on the physical effects of climate change, with less attention devoted to “transition risks” related to negative economic effects of enacting climate-related policies and phasing out high-emitting technologies. Further, most of the work in this area has measured transition risks using backward-looking metrics, such as carbon emissions, which does not allow us to compare how different policy options will affect the economy. In a recent Staff Report, we capitalize on a new measure to study the extent to which banks’ loan portfolios are exposed to specific climate transition policies. The results show that while banks’ exposures are meaningful, they are manageable.

Posted at 7:00 am in Banks, Climate Change, Financial Institutions | Permalink

July 6, 2023

Where Is Inflation Persistence Coming From?

Martin Almuzara, Babur Kocaoglu, and Argia Sbordone

Elevated inflation continues to be a top-of-mind preoccupation for households, businesses, and policymakers. Why has the post-pandemic inflation proved so persistent? In a Liberty Street Economics post early in 2022, we introduced a measure designed to dissect the buildup of the inflationary pressures that emerged in mid-2021 and to understand where the sources of its persistence are. This measure, that we labeled Multivariate Core Trend (MCT) inflation analyzes whether inflation is short-lived or persistent, and whether it is concentrated in particular economic sectors or broad-based.

Posted at 11:00 am in Inflation, Macroeconomics | Permalink

The EGIs: Analyzing the Economy Through an Equitable Growth Lens

Rajashri Chakrabarti, Dan Garcia, and Maxim Pinkovskiy

Dectorative image of collage of polaroids of diverse group of people portraits.

Inflation remains elevated, labor markets are close to the strongest they have been, real consumption is up year-over year, but all of these observations are with respect to averages. Behind these macroeconomic trends can be widely varying experiences across different demographic and socioeconomic groups that make up our society. To provide researchers, practitioners, and the public with timely, regularly updated and comprehensive answers to these questions, we launched the Equitable Growth Indicators (EGIs)—a new tool to help foster the evolving discussion about economic inequality and equitable growth. To illustrate the utility of the EGIs, we provide examples of some striking differences in trends captured in the May release of the EGIs on inflation, real earnings, and real spending. More heterogeneity analysis and data are available at nyfed.org/egi.

Posted at 10:00 am in Equitable Growth, Household Finance, Inflation | Permalink

June 27, 2023

Not Just “Stimulus” Checks: The Marginal Propensity to Repay Debt

Gizem Koşar, Davide Melcangi, Laura Pilossoph, and David Wiczer

Decorative image: Man holding a piece of paper working on a calculator.

Households frequently use stimulus checks to pay down existing debt. In this post, we discuss the empirical evidence on this marginal propensity to repay debt (MPRD), and we present new findings using the Survey of Consumer Expectations. We find that households with low net wealth-to-income ratios were more prone to use transfers from the CARES Act of March 2020 to pay down debt. We then show that standard models of consumption-saving behavior can be made consistent with these empirical findings if borrowers’ interest rates rise with debt. Our model suggests that fiscal policy may face a trade-off between increasing aggregate consumption today and assisting those with the largest debt balances.

Posted at 7:00 am in Expectations, Household Finance | Permalink

June 23, 2023

2nd Annual International Roles of the U.S. Dollar Conference

Alain Chaboud, Ricardo Correa, Patrick Douglass, Linda S. Goldberg, Juan M. Londono, and Fabiola Ravazzolo

photo: three presenters of the US Dollar conference: left to right: Leonardo Elias Financial Research Economist Federal Reserve Bank of New York; Hyeyoon Jung Financial Research Economist Federal Reserve Bank of New York; Darrell Duffie Adams Distinguished Professor of Management and Professor of Finance at the Graduate School of Business, and professor by courtesy, Department of Economics Stanford University

The U.S. dollar plays a central role in the global economy. In addition to being the most widely used currency in foreign exchange transactions, it represents the largest share in official reserves, international debt securities and loans, cross-border payments, and trade invoicing. The ubiquity of the U.S. dollar in global transactions reflects several key factors, including the depth and liquidity of U.S. capital markets, the size of the U.S. economy, the relatively low cost of converting dollars into other currencies, and an enduring confidence in the U.S. legal system and its institutions.

Posted at 9:00 am in Financial Institutions, International Economics, Nonbank (NBFI) | Permalink

Markets & Policy Implementation

Liberty Street Economics

The Post‑Pandemic r*

Credit Card Markets Head Back to Normal after Pandemic Pause

Why Do Forecasters Disagree about Their Monetary Policy Expectations?

Inflating Away the Debt: The Debt‑Inflation Channel of German Hyperinflation

Runs on Stablecoins

How Exposed Are U.S. Banks’ Loan Portfolios to Climate Transition Risks?

Where Is Inflation Persistence Coming From?

The EGIs: Analyzing the Economy Through an Equitable Growth Lens

Not Just “Stimulus” Checks: The Marginal Propensity to Repay Debt

2nd Annual International Roles of the U.S. Dollar Conference

Economic Inequality

Most Read this Year