Economic Synopses are short essays from our economists that provide insight and commentary on timely issues in economics, finance, banking and other areas, written for the interested, but not necessarily expert, reader.
U.S. firms have adjusted well in response to the recent appreciation of the dollar.
China's trade surplus has been dampened by an increasing deficit in services driven by tourism.
Because oil-producing countries do hold public debt and do default, we must understand how oil reserves and production affect risk and economic performance.
Capacity and employment are affected by cyclical factors, but employment must also adjust to structural factors.
U.S. households decreased their credit card debt substantially between 2007 and 2013. Although this “deleveraging” may be a consequence of credit demand (households want to borrow less) or supply (banks provide less credit), it is usually attributed to the latter.
Important demographic changes in the developed world in recent years may have long-run economic consequences. As a result, such changes have started to play a more important role in the design of economic policies.
Labor compensation has grown slowly during the recovery of the U.S. economy from the 2007-09 recession. Real labor compensation per hour in the nonfarm business sector was 0.5 percent lower 20 quarters after the start of the recovery.
The U.S. national labor market has recovered from the effects of the 2007-09 recession. The national unemployment rate was 10 percent at the end of 2009 but now stands at only 4.7 percent, which the Federal Open Market Committee considers close to the rate’s long-run value.
Many pundits in the media claim that labor market regulations, such as the Affordable Care Act and the increase in the minimum wage, have slowed the recovery from the 2007-09 recession (see, for example, Roy, 2014, and McNickle, 2014). The claim is that recent labor market regulations have increased labor costs and, as a result, employers have been reluctant to hire workers, leading to a slow labor market recovery.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, has revived discussion of the Too Big To Fail (TBTF) issue for large U.S. financial institutions. TBTF arises when the government and regulators fear that a bank’s failure would cause widespread damage to the financial system.
In recent years, the United States has had positive net international income (e.g., stock dividends and bond coupon payments) despite being a net debtor to China. China, however, has had negative net income, despite being a lender to the United States. Recent policy changes in China could end this trend.
Eggertsson and Krugman (2012) contend that “if there is a single word that appears most frequently in discussions of the economic problems now afflicting both the United States and Europe, that word is surely debt.” These authors and others offer theoretical models that present the debt phenomenon as follows: The economy is populated by impatient and patient individuals. Impatient individuals borrow as much as possible, up to a debt limit. When the debt limit suddenly tightens, impatient individuals must cut expenditures to pay their debt, depressing aggregate demand and generating debt-driven slumps. Such a reduction in debt is called deleveraging.
The current state of the federal government’s fiscal policy has been largely determined by the response to the Great Recession and the ongoing expansion of government transfers. The fiscal measures undertaken to mitigate the impact of the previous recession resulted in deficits of unprecedented magnitude for the postwar period and a prolonged, politically contentious period of normalization.
The Chinese government has the largest foreign exchange reserves in the world, which are assets (usually bonds) held by a central bank or other government agency that are liabilities of some foreign entity.
Gas prices in many midwestern cities and St. Louis in particular follow a regular weekly pattern. What is driving the phenomenon?
Recent economic studies have documented rising income inequality in the United States.1 Which macroeconomic factors have contributed to the long-term increase?
The manufacturing Purchasing Managers’ Index (PMI) measures the growth of economic activity in the manufacturing sector and, indirectly, the whole economy. It is constructed from a monthly survey of private companies.
Gross domestic product (GDP) contracted significantly during the Great Recession and has grown at a considerably slower pace than its historical average during the subsequent recovery. Both GDP and GDP per capita have diverged noticeably from their pre-recession trends: As of 2015:Q4, they are 19 percent and 16 percent below their 1955-2007 trends, respectively.
After the collapse of the Soviet Union in 1989, Russia’s gross domestic product declined by more than 5 percent per year for 10 years, its birth rate sharply declined, and its death rate peaked. The timing of these events has led to the popular view that the collapse of the Soviet Union either caused or revealed challenges facing the Russian economy.
Business cycles are mainly about fluctuations in private investment: During recessions, private investment contracts proportionally more than output; during expansions, it expands proportionally more. Although private consumption moves in tandem with the business cycle, it exhibits considerably less variation than investment.
The aggregate performance of the labor market is widely followed by policymakers, such as the Federal Reserve, and the general public. The most common measure is the unemployment rate, which is the fraction of individuals in the labor force who are unemployed but actively seeking work.
The Great Recession caused a surge in unemployment. In the last quarter of 2009, the unemployment rate reached its peak at 9.9 percent. At that time, the average duration of unemployment spells (continuous time in unemployment) was 30 weeks. It would rise further—to 40 weeks—by the second quarter of 2010.
In January 2012, the Federal Reserve joined many other central banks in adopting a numerical inflation target: 2 percent over the medium term. Monetary policy tends to affect the economy with a lag, so prudent monetary policymaking in an inflation-targeting regime requires a forecast of future inflation over the medium term.
China’s economy is believed to be highly dependent on exports. If it is, then keeping the value of its currency low would be important for China’s economic growth—cheaper exports are more attractive.
Sound macroeconomic policies are key to preventing solvency crises in a currency union.
The labor force participation rates for prime-working-age men have been falling across countries.
The business cycle is more highly synchronized between countries that trade more differentiated intermediate products with each other.
The negative relationship between unemployment and earnings growth seems to hold across states.
Inflation expectations formed in the mid-2000s weren't very accurate"”in large part because of the shocks from the recession and financial crisis.
A delinquency rate of 15 percent for all student loan borrowers implies a delinquency rate of 27.3 percent for borrowers with loans in repayment.
GDP per hour (rather than GDP per capita) better measures labor productivity.
Countries with weaker economic fundamentals experienced higher currency volatility and capital flows.
Fear of demand-driven deflation calls for expansionary economic policies.
Measuring the output gap without accounting for the trend in labor force participation may lead to persistent misdiagnoses of the state of the economy.
An unemployment statistic based on unemployment insurance is less useful because it does not measure unemployment itself.
Longer benefits may reduce unemployed workers' job search efforts, decreasing their likelihood of becoming reemployed.
Deferment or forbearance may be masking the true student loan default rates in recent years.
Student loan borrowing accelerated during the Great Recession and now outranks any non-mortgage debt, including auto loans and credit card debt.
We construct a new measure of the unemployment rate based on a plausible assumption that some, but not all, of the discouraged workers reenter the labor force.
While households decreased credit card debt between 2007 and 2010, the process varied by education level between the extensive margin (how many households borrowed) and the intensive margin (how much households borrowed).
The volume and volatility of international capital flows have motivated recent interest in the optimal use of capital controls and the communication and coordination among central banks.
The diverging paths of total hours worked account for most of the difference in GDP growth between Japan and the United States.
The short-term volatility of the price of nondurable goods, especially energy, may explain why inflation occasionally appears off target. The recent decline in average inflation may be partially attributable to the ongoing reduction in the cost of durable goods and asignificant deceleration in the inflation rate of services expenditures.
The current housing boom isthe first nationwide boom since the postwar era not driven by increased demand for owner-occupied housing.
Firms started during recessions, especially those started in 2008, have grown less during the first 3 years of their life than those started in non-recession years.
The economy is too complex to be summarized by a single rule. Economies are constantly changing in ways difficult to explain after the fact and nearly impossible to predict. Consequently, policymakers seem destined to rely on discretion rather than rules.
The Federal Reserve is just one of several central banks that have adopted forward guidance since the beginning of the financial crisis and in an environment of near-zero policy rates (zero lower bound).
One of the most interesting features of the Great Recession is that"”contrary to other global recessions"”it was mostly a rich-country phenomenon.
Forward guidance consists of communicating to the public the stance of monetary policy that is expected to prevail in the future.
Economic growth requires more labor, more and better capital, and up-to date technology"”what might be collectively referred to as social infrastructure"” to support entrepreneurship and efficient markets. It is hardly surprising that periods of more-rapid economic growth include invention, innovation, new methods of production (e.g., the assembly line, robotics), and entrepreneurship.
Manufacturing jobs as a percentageof private employment has fallen by half"”from about 21 percent in 1987 to less than 11 percent today. Yet, manufacturing output as a percentage of private output is cyclical with a fairly flat trend averaging about 14 percent.
Not all who are eligible to receive unemployment benefits actually collect them.
Over their working lifetimes, college graduates who entered the workforce many decades ago experienced a greater increase in wages than more-recent college graduates.
For a significant number of industries - representing roughly a quarter of the U.S. economy - the most recent recession has been business as usual when judged by pre-recession trends. For a slightly larger group of industries, mostly related to construction, manufacturing, and trade, the contractions have been severe, reinforcing a preexisting process of steady relative decline.
Despite the recent recovery in house prices, most state economies have yet to recover from the Great Recession.
U.S. gross domestic product (GDP) contracted significantly and persistently during the recent financial crisis and recession. Lessons can be learned from comparing the U.S. experience with that of other industrialized countries.
Home equity did not increase much for households younger than 35 years of age between 1998 and 2007 because the increase in house prices was offset by an equivalent increase in mortgage debt.
Markets have come to believe that the Bank of Japan can and will raise Japan's inflation rate to meet its new target.
Recovery of the construction sector seems a necessary ingredient for a strong and sustained recovery of economic activity and a reduction in the unemployment rate.
The male labor force was hit harder during the recent recession because more jobs were lost in occupations and sectors that traditionally employ more men.
The November 2012 unemploymentrate would have been 1.6 percenthigher had the labor forceparticipation rate declined as it didfollowing the 2001 recession.
Repatriation taxes are unlikely to explain the rise in cash holdings of U.S. firms.
Federal revenue is currently well below its postwar, pre-crisis average, while expenditure is well above, with both factors contributing to a large and persistent deficit. Under current law, the deficit situation would be quickly, if painfully, resolved, with the lion's share resulting from increased tax revenue.
When the economic shocks that cause recessions in different economies have large common components, there may be lessons to be learned by studying how different economies respond.
The Fed's concern for housing is a relatively new phenomenon. Historically, house price bubbles have been localized and affected only areas with rapid growth. The latest housing bust, however, was a nationwide problem with important ramifications for employment and economic activity.
It is reasonable to believe that output, employment, and inflation will return to their long-run or targeted values slowly and steadily.
The behavior of term OIS rates following the three instances of FOMC verbal guidance provides no support for the efficacy of the FOMC's forward guidance monetary policy.
Assessing the state of the economy requires estimates of trends in employment and the labor force. Large monthly fluctuations make it difficult to infer these from monthly data.
If investment spending is sufficiently insensitive to interest rate changesand the effect of Fed actions on interest rates is sufficiently weak, the net effect of the persistent zero interest rate policy could be negative.
Politicians, market participants, and economists have argued aboutwhether the increased trading induced by the growth of index funds overthe past decade is a cause of high commodity prices.
Little difference in economic performance during the past two decades"¦is consistent with the theoretical and empirical evidence that monetary policy has no permanent effect on real variables.
The United States can simply recycle the financial capital inflows from China and re-export them back to China in the form of FDI. In so doing, the United States gains a substantially larger rate of return from FDI than China does from owning U.S. government bonds.
Gross job losses for large firms were 60 percent higher in 2009:Q2 than in 2006:Q1, while those for medium and small firms were 42 percent and 12 percent higher, respectively.
Okun's law can be a useful guide for monetary policy, but only if the natural rate of unemployment is properly measured.
FDI flows from overseas parent companies contracted, but intracompany debt and reinvested earnings were affected much more than equity FDI.
Recent changes in the relationshipsamong GDP growth, the unemploymentrate, and the employment-to-populationratio cast doubt on using these relationshipsto predict future unemployment.
Initial claims may now be useful for forecasting employment growth during periods of increasing economic activity.
It is not clear how monetary policy might be used to reduce local unemployment rates where recruiting intensity is high but the right kind of worker is hard to find.
The enormous quantity of excess reserves can create an even greater expansion in the money supply.
The recent behavior of key fiscal policy variables draws some parallels with the U.S. experience in the Civil War and the two world wars. A specific concern is the possibility of high inflation to finance the accumulated debt.
One common threshold is that labor market conditions are improving when weekly unemployment claims fall below 400,000.
In order to maintain its credibility, however, the FOMC will have to take actions consistent with achieving its stated inflation objective.
The spot prices of West Texas Intermediate and Brent crude oil recently diverged. If this divergence persists, economists and energy analysts may want to focus on Brent prices when predicting the level of gasoline prices.
Federal Reserve programs during the recent financial crisis sought to provide liquidity to individual firms or industries. An interesting additional question is whether the aggregate amount of liquidity in the economy was appropriate before and during the recent financial crisis.
Households are the sector that the financial accelerator appears to have hit hardest, according to the data.
According to economists, in the 1980s and 1990s, immigration of low-skilled workers may have increased the labor supply of highly skilled women, and immigration of highly skilled workers may have increased the rate of innovation in the United States.
Firms started repaying their debts during 2008-2009, and they did so while simultaneously accumulating highly liquid assets. These two observations are puzzling if one believes firms are purportedly starving for credit but cannot obtain it.
The only outcome consistent with the Fisher equation holding and the FOMC's zero interest rate policy is that the "long run" is considerably longer than 4.5 years.
In response to volatile market conditions, the G-7 financial authorities announced late on March 17 that they would jointly intervene the next day to reduce the value of the yen, citing concerns about "excess volatility and disorderly movements." The yen immediately depreciated and traded with much less volatility in the subsequent week.
The government increased payments to individuals without reducing spending elsewhere in the budget.
The rise in the national debt... is entirely a consequence of the federal government's increase of expenditures without an offsetting increase in revenues.
Despite U.S. fiscal problems, the Fed appears to still retain excellent inflation credibility with financial markets"¦ Although confidence in the Fed might explain the quiescence of inflation expectations, the structure of U.S. government debt may be more important"¦ [I]nflating away the U.S. debt simply would not work because a high proportion of the debt is in short-term or inflation-protected securities.
The average relationship between changes in the 10-year Treasury yield and changes in the funds rate over the 1987-2007 sample period is not indicative of the relationship between changes in the funds rate and changes in the 10-year Treasury yield that existed for more than a decade prior to the financial crisis.
But because this [Chinese] exchange rate policy is externally focused and relies heavily on regulations, which restrain normal market forces, it is reasonable to say that the policy constitutes currency manipulation for purposes of gaining an advantage in trade.
In contrast, most economists believe that central banks have little or no ability to directly affect employment. The effect of monetary policy actions on employment is indirect and stems from central banks' ability to affect output growth in the short run and achieve price stability in the long run.
The FOMC's two-pronged approach involves a potential conflict: forward guidance assumes a high degree of substitutability across the maturity structure, while quantitative easing assumes a low degree.
The FOMC's "mandate-consistent inflation rate" is generally judged to be "about 2 percent or a bit below."
The effect of QE2 on interest rates could be small and limited to an announcement effect.
With the funds rate driven to levels far below its target, the FOMC had no recourse but to adjust the target accordingly.
Large-scale asset purchases may have limited power to raise TIPS-implied inflation expectations"”something that might appeal to policymakers fighting deflation.
Must the FOMC increase its target before inflation, or will inflation increase and cause the FOMC to increase its target?
Why was the increase in the money stock so small when the increase in the monetary base was so large?
Market participants rebalance their portfolios in advance of a recession.
The important point is that both the Chinese trade surplus with the United States and the amassed foreign reserves result from the savings decisions of Chinese consumers.
During a recession, the participation rate typically declines as discouraged workers exit the labor force.
The housing market crisis is the latest reminder that asset prices can and do run wild at rates capable of negative effects on real economic activity. Not surprisingly, this has reinvigorated debate over whether central banks should respond to asset price bubbles.
The Reserve Bank presidents are fully accountable to our democratic institutions and the decentralized structure promotes healthy debate on monetary policy and regulatory issues.
Credit and M2 may be driven simultaneously as part of a broader financial intermediation process; a common underlying factor may be the interest rate.
We offer a word of caution to policymakers: Policies based on point estimates of the output gap may not rest on solid ground.
The changes in international trade and finance are linked to the changes in business cycle correlations.
We should expect a third business cycle in succession in which the real federal funds rate reaches its trough well after the economy begins to recover.
Our finding is consistent with some recent, substantial volatility in the U.S. corporate bond market and leaves open a possibility that additional, future shocks to default premia may have long-lived effects.
Would financial markets and the economy have been better off if the Fed pursued a policy of quantitative easing sooner?
Caution is necessary when making inferences based solely on aggregate loans data.
Pronounced cycles and booms in asset prices have usually accompanied widening trade deficits.
The sale of typical securities would force the Fed to contract its lending programs, whereas the sale of Fed bills would not.
It's hard to make a firm prediction as to when the Fed will raise interest rates.
Economists focus on certain indicators that might signal when one business expansion ends and the next one begins.
The U.S. financial growth between 1995 and 2006 certainly translated into record-high shareholder returns. Labor compensation returns were also dramatically high at the onset of the current crisis.
Chairman Bernanke seems to suggest that the purchase of a large quantity of longer-term government securities might reduce longer-term rates.
"Here, I answer selected questions asked by readers of my earlier essay."
"One way to examine the composition of assets on the Fed's balance sheet is to group them according to the objectives of the programs used to acquire them."
"Banks typically tighten credit standards and/or loan terms as the economy weakens and nonperforming loans increase. But an adverse shock from outside the financial sector can be just as important"”such as a sharp increase in oil prices or a plunge in house prices."
"A bankers' acceptance is created when a bank agrees to "˜accept,' or guarantee, a future payment between two firms."
"The first two quarters of 2008 show sharply decreased expansion and increased contraction, followed by a third-quarter rebound."
"The current recession actually looks relatively mild, so far, when we look at the decline in industrial production."
"Paying interest on reserves should allow us to better control the federal funds rate."
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