Liberty Street Economics

August 16, 2023

What Makes Cryptocurrencies Different?

Anders Brownworth, Jon Durfee, Michael Lee, and Antoine Martin

Decorative photo: B for Bitcoin symbol on dark blue background with 0s and 1s floating and lines connected to dots to imply network.

Permissionless blockchains, which support the most popular cryptocurrency networks like Bitcoin and Ethereum, have shown that it is possible to transfer value without relying on centralized trusted third parties, something that is new and remarkable (although perhaps most clearly useful for less developed financial markets). What makes permissionless blockchains able to transfer value without relying on a small number of trusted third parties is the combination of several components that all need to work together. The components themselves are not particularly new, but the combination of these components is more than the sum of its parts. In this post, we provide a high-level overview of these components and how they interact, taking Bitcoin as an example.

Posted at 7:00 am in Cryptocurrencies, Financial Markets | Permalink | Comments (1)

August 14, 2023

The Federal Reserve’s Two Key Rates: Similar but Not the Same?

Gara Afonso, Marco Cipriani, Gabriele La Spada, and Peter Prastakos

photo of the federal reserve building in Washington DC.

Since the global financial crisis, the Federal Reserve has relied on two main rates to implement monetary policy—the rate paid on reserve balances (IORB rate) and the rate offered at the overnight reverse repo facility (ON RRP rate). In this post, we explore how these tools steer the federal funds rate within the Federal Reserve’s target range and how effective they have been at supporting rate control.

Posted at 7:00 am in Central Bank, Fed Funds, Federal Reserve, Monetary Policy | Permalink

August 10, 2023

The Evolution of Short-Run r* after the Pandemic

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

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

This post discusses the evolution of the short-run natural rate of interest, or short-run r*, over the past year and a half according to the New York Fed DSGE model, and the implications of this evolution for inflation and output projections. We show that, from the model’s perspective, short-run r* has increased notably over the past year, to some extent outpacing the large increase in the policy rate. One implication of these findings is that the drag on the economy from recent monetary policy tightening may have been limited, rationalizing why economic conditions have remained relatively buoyant so far despite the elevated level of interest rates.

Posted at 7:00 am in DSGE, Macroeconomics, Monetary Policy | Permalink

August 9, 2023

The Post-Pandemic r*

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

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, DSGE-Forecast, 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

Markets & Policy Implementation

Liberty Street Economics

What Makes Cryptocurrencies Different?

The Federal Reserve’s Two Key Rates: Similar but Not the Same?

The Evolution of Short-Run r* after the Pandemic

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?

Economic Inequality

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