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2008 Economic Commentaries

  • A New Role for the Exchange Stabilization Fund


    Owen F. Humpage

    Abstract

    Recently, the U.S. Treasury announced a new, temporary insurance program for U.S. money-market mutual funds. To guarantee payment of these funds’ liabilities, the Treasury will use the assets of its Exchange Stabilization Fund. Created in the 1930s to stabilize the exchange value of the dollar, it has been tapped on occasion to supply loans to foreign countries in financial distress. This latest use of ESF assets is unlike anything the Fund has been used for before. Read More

  • Covered Bonds: A New Way to Fund Residential Mortgages


    O. Emre Ergungor

    Abstract

    Like the now government-owned Fannie Mae and Freddie Mac, large investment banks helped create funds to finance new mortgages by issuing securities backed by pools of existing mortgages. But private firms have abandoned these instruments, and with them a large source of mortgage funds has disappeared. Four large investment banks plan to create a new U.S. market for an old instrument, hoping to bring liquidity back to the mortgage market. Read More

  • Rising Relative Prices or Inflation: Why Knowing the Difference Matters


    Owen F. Humpage

    Abstract

    Almost everyone uses the word inflation to refer to any increase in prices, but it ought to be reserved for a just one kind of price increase. True inflation has a different cause—and a different cure—than the price increases of goods and services caused by constantly changing supply and demand conditions. The Federal Reserve can and should act to control inflation, but when relative-price changes are putting pressure on businesses’ balance sheets and consumers’ pocketbooks, the Fed can do little. Read More

  • Trouble Ahead for Student Loans?


    O. Emre Ergungor Ian Hathaway

    Abstract

    The market for student loans may differ in some respects from other financial markets, but private lenders are the primary source of funds. As in other markets, the incentive to lend those funds comes from the ability to make a profit. But recent turmoil in financial markets is affecting all of the factors that contribute to the profitability of student loans, leading to speculation that the availability of such loans will fall. Read More

  • Stamp Scrip: Money People Paid to Use


    Bruce Champ

    Abstract

    Substitutes for government-issued money are produced and used from time to time even in countries like the United States. Understanding why people turn to these substitutes and to what degree they are successful—or not—can teach us a lot about the elements essential to a well-functioning currency. Read More

  • The Great Moderation: Good Luck, Good Policy, or Less Oil Dependence?


    Andrea Pescatori

    Abstract

    Three explanations have been suggested for the moderation in real GDP and inflation that has occurred in industrialized countries since the 1980s: good luck, better monetary policy, and structural changes in the economy. Recent research finds that better monetary policy explains most of the moderation in inflation, and good luck and the less-intensive use of oil (a structural change) have played a major role in the moderation of GDP. Read More

  • Explaining Apparent Changes in the Phillips Curve: The Great Moderation and Monetary Policy


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    Observations that the Phillips curve may be deviating from historical norms are important to policymakers because deviations would imply that more or less output has to be sacrificed to achieve a permanent reduction in long-term inflation. But we argue that recent economic shocks and a shift in the Fed’s response to inflation may be leading economists to mis-estimate the curve. Read More

  • Explaining Apparent Changes in the Phillips Curve: Trend Inflation Isn't Constant


    Charles T. Carlstrom Timothy Fuerst

    Abstract

    Monetary policymakers look to the Phillips curve—an expression of the relationship between inflation and the degree to which the economy is operating relative to its potential—for information about the cost of actions undertaken to lower inflation. Recent estimations of the curve suggest it is deviating from historical norms. We argue that changes in trend inflation and Fed operating procedures are not being taken into account in these estimations and that when they are, changes in the curve are minor and need not concern policymakers. Read More