The July Indexes of Coincident Economic Indicators (CEIs) for New York State, New York City, and New Jersey, released today, reveal that economic activity continued to expand in both New York State and New York City and—for the second month in a row—picked up moderately in New Jersey.
August 24, 2011
August 22, 2011
A Look at the Accuracy of Policy Expectations
Since the 1980s, the primary policy tool of the Federal Reserve has been the federal funds rate. Because expectations of the future path of the funds rate play a central role in the term structure of interest rates and thus the monetary transmission mechanism, it is important to know how accurate these expectations are in predicting the funds rate. In this post, we investigate this issue using a well-known survey of private sector forecasters. We find that forecasts tend to over-predict the funds rate in easing cycles and under-predict it in tightening cycles. In addition, while forecasts during tightening cycles have become more accurate over time, forecast accuracy during easing cycles has not improved.
August 19, 2011
Historical Echoes: These “Clams” Really Were Money
While money has taken all forms—precious commodities, beads, wampum, the large stones of Yap—we tend to think of those forms of money as archaic.
Posted at 10:00 am in Historical Echoes | Permalink
August 17, 2011
Tax Buyouts: Raising Government Revenues without Increasing Labor Tax Distortions
At a time of increasing fiscal pressures both here and abroad, it seems important to consider ways of raising government revenues without discouraging people from working. This post describes a revenue raising plan—a tax “buyout”—that does just that. The buyout would give you, the taxpayer, the option each year of paying a lump sum to the government in exchange for a given reduction in your marginal tax rate that year. In effect, you would use the lump sum payment to buy yourself a lower marginal tax rate, which would in turn give you more incentive to work. The buyout would be risk free: you wouldn’t have to decide whether to take the buyout until after you know your labor income. Why would this be good for you? If you choose to take it, you end up paying less taxes. If you don’t take it, you are just as well off as before. Why is this good for society? The lower marginal tax rate induces you to work more, so that some of the distortionary effects of taxation would disappear. Furthermore, your participation would be voluntary, so the buyout should be politically palatable.
August 15, 2011
What to Make of Market Measures of Inflation Expectations?
Central banks and investors around the world closely monitor developments in financial markets to gauge expectations of future interest rates and inflation. In this post, we argue that two of the most commonly used market-based inflation expectations measures—TIPS breakevens and inflation swaps—are noisy. Although movements in both measures provide policymakers with valuable information, readings should always be interpreted with care.
Posted at 10:00 am in Exchange Rates, Expectations, Financial Markets, Inflation, Macroeconomics | Permalink | Comments (2)
August 1, 2011
International Spillovers on Government Bond Yields: Are We All in the Same Boat?
Should we expect the Federal Reserve’s large-scale asset purchases since late 2008 to have much impact on bond yields beyond U.S. borders? Prior studies (mostly of particular events, such as Neely [2010]) say yes. They find evidence of cross-country spillovers in the international bond market, but provide little insight into the strength, scope, and dynamics of these spillover effects. In this post, we quantify the international transmission of financial shocks between the U.S. government bond market and three other developed countries, thus providing a benchmark measure of the cross-country spillover effects in the international bond market. We find that an unexpected increase of 1 percent in long-term U.S. bond yields can lead to a 0.14 percent to 0.19 percent rise in the bond yields of other developed countries on impact, and that the cumulative spillover effect from U.S. to foreign bond markets ranges from 0.26 percent to 0.35 percent over a longer horizon.
July 29, 2011
Historical Echoes: What’s Missing in This 1953 Portrait of the American Economy?
In its January 1953 issue “The American and His Economy,” Life magazine presents a sidebar entitled “How Future Looks to Five Economists,” in which Paul Samuelson, John Kenneth Galbraith, and other eminent economists discuss the national outlook, given the impending defense cutbacks. Samuelson states, “Congress and the new administration have the power to alleviate any recession that might be brought on by reduced defense and investment expenditures.” The others are also optimistic, citing additional offsetting factors. What’s missing? Except for one oblique reference to “credit easing,” no one mentions the Fed or monetary policy—even though economists knew then that expansionary monetary policy (that is, lowering interest rates) can help offset contractionary fiscal policy (such as government spending cuts).
Posted at 10:00 am in Historical Echoes | Permalink
July 27, 2011
Inflation Expectations and Behavior: Do Survey Respondents Act on Their Beliefs?
Surveys of consumers’ inflation expectations are now a key component of monetary policy. To date, however, little work has been done on 1) whether individual consumers act on their beliefs about future inflation, and 2) whether the inflation expectations elicited by these surveys are actually informative about the respondents’ beliefs. In this post, we report on a new study by Armantier, Bruine de Bruin, Topa, van der Klaauw, and Zafar (2010) that investigates these two issues by comparing consumers’ survey-based inflation expectations with their behavior in a financially incentivized experiment. We find that the decisions of survey respondents are generally consistent with their stated inflation beliefs.
July 25, 2011
The Vanishing U.S.‑E.U. Employment Gap
The employment-to-population ratio—the share of adults that are employed—has historically been much higher in the United States than in Europe. However, the gap narrowed dramatically in the last decade and had almost disappeared by the end of 2009. In this post, we show that the narrowing employment gap is due to three factors: declining U.S. employment rates across almost all age-gender groups; more women working in Europe, particularly prime-age and older workers; and rising employment for older European men. We link most of these shifts to the influence of underlying trends (many reflecting changes in European social policies) and to differences in labor market performance during the Great Recession.
July 22, 2011
Historical Echoes: “South Sea Bubble” Deals Speculators a Bad Hand
The “South Sea Bubble” in Britain, 1720, followed the typical pattern of a period of speculation, “irrational exuberance,” and the subsequent collapse of a major company or industry. A speculative frenzy fueled by corporate deceit, investor hysteria, and other market forces caused the South Sea Company’s share price to skyrocket from £128 in January to a whopping £1,050 in June. By September, the price plummeted to £175.
Posted at 10:00 am in Historical Echoes | Permalink
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