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Press Release

Cleveland Fed researchers on household debt and housing; government spending; monetary policy

Household debt has increased in back-to-back quarters for the first time since 2008, with mortgages accounting for 63 percent of the increase.

Will we see continued improvement in the real estate market? Federal Reserve Bank of Cleveland researchers Emre Ergungor and Daniel Kolliner say the data presents a mixed picture. On the one hand, houses are still very affordable despite rising mortgage rates and home prices. On the other hand, lenders and consumers seem to be highly sensitive to perceived risks in the market, as evidenced by tightening credit standards and the sharp decline in mortgage demand following a mild increase in mortgage rates. Going forward, the researchers say the uncertainty over the future pace of the housing recovery may cap the rate of increase in home values and the pace of construction activity. Read Household Debt Inches Higher

Estimating the effects of government spending is anything but simple.

Public debate about the effects of government spending heated up after record-large stimulus packages were enacted to address the fallout of the financial crisis. While it seems a simple problem to estimate the effect of government spending on output, called the government spending multiplier, Federal Reserve Bank of Cleveland researcher Daniel Carroll says it is anything but. Writing in an Economic Commentary, Carroll highlights some of the major challenges involved in measuring the multiplier and the factors that influence the impact of government spending, such as the timing and type of spending, how it is financed, and the environment in which the spending takes place. Read Why do Economists Still Disagree over Government Spending Multipliers?

Accounting for inertia in both the level and changes in the Fed funds rate helps improve the accuracy of Taylor rules.

The Taylor rule is an equation which is used to describe the factors that have helped shape past monetary policy decisions. The rule expresses the federal funds rate – a short-term interest rate that has been one of the Federal Reserve’s policy tools -- in terms of the rate of inflation and the gap between the economy’s current performance and its full potential, and it captures the historical behavior of the funds rate fairly well. But Federal Reserve Bank of Cleveland researcher Charles Carlstrom and University of Notre Dame professor Timothy Fuerst say the rule does a better job when it includes adjustments that reflect the likelihood that the Federal Open Market Committee (FOMC), the central bank’s policymaking group, moves more slowly than the Taylor rule predicts.

Carlstrom and Fuerst say two types of inertia are important for understanding how the funds rate was set in the past. In addition to disliking large changes in the level of the funds rate, the researchers say the FOMC might also have wanted to avoid any change in the pace of changes it had been making to the rate. According to Carlstrom and Fuerst, a rule reflecting adjustments for both changes in the funds rate as well as the level of the funds rate helps explain past policy decisions better.

Why capture historical monetary policy with an equation like the Taylor rule?  First, say the researchers, policymakers may want to use the rule as a guidepost in setting policy. Second, the public may use the estimates provided by the rule to get a better idea of the future course of monetary policy. Although the federal funds rate has been near zero since the financial crisis and the FOMC has indicated that it will likely be there for a considerable time, eventually short-term rates will increase and become important again in monetary policy making. When that happens, there will be renewed interest in predicting where those rates will be in the future. Read Adding Double Inertia to Taylor Rules to Improve Accuracy

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.218.1892