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2016 Economic Commentaries

  • New Normal or Real-Time Noise? Revisiting the Recent Data on Labor Productivity

    Mark Bognanni John Zito


    Some economic observers have argued that the weakness of recent productivity data indicates we have entered a new era of low economic growth. To investigate that claim, we study labor productivity between 1968 and 2016 and compare recent productivity growth to its past behavior. We find that though recent productivity data are unambiguously weak, they are not greatly out of line with the variation of productivity over the historical record. We find that when labor productivity has been weak in the past, it did not persist at those levels. In addition, we find a systematic tendency to understate growth in real time, suggesting that the average rate of the past six years will likely be revised up in future. Read More

  • The Fed’s Yield-Curve-Control Policy

    Owen F. Humpage


    The recent global financial crisis left governments in many advanced countries with very heavy debt burdens and their central banks with huge portfolios of government bonds. With many central banks today still facing policy rates that are uncomfortably close to zero, some may follow the example of Japan, which recently added a new long-term interest-rate target to its short-term target to give itself "yield-curve control." The Federal Reserve's foray into similar territory around the Second World War suggests that combining yield-curve control with quantitative easing when government borrowing needs are substantial can create constraints on monetary policy that are not easily removed. Read More

  • The Likelihood of 2 Percent Inflation in the Next Three Years

    Ellis W. Tallman Saeed Zaman


    This Commentary examines inflation forecasts generated from a range of statistical models that historically have performed well at forecasting inflation. For each model, we look at the most likely future forecast path and the distribution of forecasts around that path. We show that the models project generally rising inflation, but, in contrast to other forecasts, five out of six models assign a less than 50 percent probability to inflation's being 2 percent or higher over the next three years. Read More

  • Geographic Mobility and Consumer Financial Health: Evidence from Oil Production Boom Towns

    Rawley Z. Heimer Timothy Stehulak Caitlin Treanor


    One way a household might handle financial distress is to relocate to another area that offers greater income opportunities. This article examines the impact of geographic mobility on consumer finances by focusing on the residents of "boom towns"—areas that saw a surge of growth in oil-drilling activity around 2010 and a bust thereafter. We find that residents who move after the bust experience stronger consumer financial health than residents who stay put. Read More

  • Manufacturing or Degree-Intensive Labor Markets: Where Do the Children of Non-College Graduates Earn More Degrees?

    Stephan D. Whitaker


    Manufacturing employment has declined since the 1970s, while the number of jobs requiring a college degree has risen. The shift has reshaped the environment in which many young people grow up and pursue their educations, potentially affecting the level of education they attain. This analysis uses the National Longitudinal Surveys of Youth to investigate the relationship between industrial composition and the educational attainment of children whose parents have only a high school education or less. The results show that the educational attainment of these youths is correlated with the region's industrial mix, though in ways that may seem somewhat surprising. Read More

  • Digging into the Downward Trend in Consumer Inflation Expectations

    Randal J. Verbrugge Carola Conces Binder


    Since mid-2014, the long-run inflation expectations of consumers have been declining. We analyze University of Michigan Surveys of Consumers microdata and find that a decline in uncertainty about future inflation is a modest part of the story over this period—but it represents the entire story when considering changes in expectations since 2012. Read More

  • Trends in Expenditures by US Colleges and Universities, 1987-2013

    Peter L. Hinrichs


    This Economic Commentary studies trends in spending by US colleges and universities in broad expenditure categories between 1987 and 2013. The results reveal that spending per student has risen in most major spending categories. This is true for both public institutions and private institutions. However, spending has risen more dramatically in some categories than others. For example, research is one category that has witnessed among the highest spending growth, and in percentage terms, there has also been a large increase in student services spending. Read More

  • Recession Probabilities

    O. Emre Ergungor


    Statistical models that estimate 12-month-ahead recession probabilities using the term spread have been around for many years. However, the reliability of the term spread as a predictor may have been affected by short-term interest rates being at zero. At the zero lower bound, long-term yields cannot go too far into negative territory due to the portfolio constraints of institutional investors. Therefore, the yield curve may not invert when it should or as much as it should despite the anticipated path of the economy. I enhance the simple model with two variables that should have predictive power for recessions. Read More

  • Does Fiscal Stimulus Work When Recessions Are Caused by Too Much Private Debt?

    Yuliya Demyanyk Elena Loutskina Daniel Murphy


    We argue that fiscal stimulus funded by public debt is effective for increasing economic activity and employment even in recessions that are caused by overborrowing in the private sector. We analyze the impact of government spending on local economies between 2007 and 2009 and find evidence that the fiscal multiplier is higher in geographical areas characterized by higher individual household debt. Read More

  • Federal Funds Rates Based on Seven Simple Monetary Policy Rules

    Edward S. Knotek II Randal J. Verbrugge Christian Garciga Caitlin Treanor Saeed Zaman


    Monetary policymakers often use simple monetary policy rules, like the Taylor rule, as an input into their decision-making. However, there are many different simple rules, and there is no agreement on a single "best" rule. We look at the federal funds rates coming from seven simple rules and three economic forecasts to investigate the range of results that can be produced. While there are some commonalities, we document that the differences in the federal funds rates suggested by the rules can be quite pronounced. Read More

  • Income Inequality Matters, but Mobility Is Just as Important

    Daniel R. Carroll Anne Chen


    Concerns about rising income inequality are based on comparing income distributions over time. It is important to remember that such distributions are snapshots of a single year, and that the same households do not necessarily appear year after year in the same quintile of the distribution. Paying attention to mobility, as well as inequality, gives us a richer picture of the income possibilities for households over time. We document changes in a measure of income mobility over the past 40 years, a period in which income inequality has increased. We find a modest level of movement through the distribution, particularly across generations. Nevertheless, the income quintile of one's parents still has a sizeable effect on how just how high one is likely to rise or how low one may fall. Read More

  • Trends in Employment at US Colleges and Universities, 1987–2013

    Peter L. Hinrichs


    This Economic Commentary studies employment at colleges and universities in the United States between 1987 and 2013. Some of the results from this analysis are in line with conventional wisdom. For example, I document that a declining proportion of faculty are full-time employees. On the other hand, some of the results are counter to popular belief. For example, I find that the share of college employees who are executives, administrators, or managers has not changed appreciably over time. Read More

  • National Preferences for Bank or Market Financing

    Raj Aggarwal John Goodell


    This article examines the reasons some countries favor bank-based financial systems and others favor markets-based financial systems. We show that when societies are more accepting of ambiguity—and by extension are more trusting—market financing is favored over relationship-based collateral financing by banks. Read More

  • The Consequences of Exposure to Violence during Early Childhood

    Dionissi Aliprantis Anne Chen


    We investigate the impact that exposure to violence in childhood has on an individual's propensity to engage in risky behaviors later in life and their probability of dying young. We document that black young males in the United States are exposed to much more violence in early childhood than their white counterparts. We also show that exposure to violence has a strong relationship with a host of undesirable later outcomes, and that relationship tends to be the same regardless of race, household income, mother's educational attainment, or family structure. Read More

  • Central Bank Lending in a Liquidity Crisis

    Filippo Occhino


    Study shows that central banks should respond to liquidity crises by lending directly to banks that will be solvent once market conditions have returned to normal. Read More

  • The Natural Rate of Interest in Taylor Rules

    Charles T. Carlstrom Timothy S. Fuerst


    The Taylor rule suggests that the federal funds rate should be adjusted when inflation deviates from the Fed's inflation target or when output deviates from the Fed's estimate of potential output. Typical formulations of the rule assume that the level of the inflation-adjusted federal funds rate that is expected to prevail in the long run, sometimes thought of as the "natural" rate of interest, is constant over time. Since this assumption is likely incorrect, we show how the Taylor rule can account for a variable natural rate by incorporating long-term productivity growth. We also show that better monetary policy outcomes may be achieved if the Fed regularly adjusts the funds rate in response to perceived changes in productivity growth, even if these changes are often measured with error. Read More