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2009 Economic Commentaries

  • Conducting Monetary Policy When Interest Rates Are Near Zero

    Charles T. Carlstrom Andrea Pescatori


    <p>This Economic Commentary explains the concerns that are associated with the combination of deflation, low economic activity, and zero nominal interest rates and describes how monetary policy might be conducted in such a situation. We argue that avoiding expectations of deflation is key and that the monetary authority needs to demonstrate an unequivocal commitment to preventing deflation. We also argue that price-level targeting might be a good device for communicating such a commitment.</p> Read More

  • Why Didn't Canada's Housing Market Go Bust?

    James MacGee


    <p>Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust.</p> Read More

  • A New Approach to Gauging Inflation Expectations

    Joseph G. Haubrich


    <p>This <em>Economic Commentary</em> explains a relatively new method of uncovering inflation expectations, real interest rates, and an inflation-risk premium. It provides estimates of expected inflation from one month to 30 years, an estimate of the inflation-risk premium, and a measure of real interest rates, particularly a short (one-month) rate, which is not readily available from the TIPS market. Calculations using the method suggest that longer-term inflation expectations remain near historic lows. Furthermore, the inflation-risk premium is also low, which in the model means that inflation is not expected to deviate far from expectations.</p> Read More

  • Credit Default Swaps and Their Market Function

    Kent Cherny Ben R. Craig


    Credit derivative instruments allow default risk to be segregated from debt of all kinds. They have granted investors the ability to hedge their portfolios and provided numerous institutions with a new source of income. However, the market for credit default swaps is neither transparent nor regulated, perhaps undermining the stability of the financial system it has helped innovate. Read More

  • The Check Is Dead! Long Live the Check! A Check 21 Update

    Paul Bauer Geoffrey Gerdes


    <p>Check 21 legislation has enabled the check clearing system to transform from paper to electronics, and much more rapidly than some had predicted. As a result of competition with other payment methods, check use has been declining since the mid-1990s, but because of the rapid adoption of electronic payment methods, checks are evolving and are unlikely to disappear anytime soon. Checks are still a convenient way to initiate some payments, and electronic processing has only made them more competitive with all types of electronic payments.</p> Read More

  • Ten Myths about Subprime Mortgages

    Yuliya Demyanyk


    <p>On close inspection many of the most popular explanations for the subprime crisis turn out to be myths. Empirical research shows that the causes of the subprime mortgage crisis and its magnitude were more complicated than mortgage interest rate resets, declining underwriting standards, or declining home values. Nor were its causes unlike other crises of the past. The subprime crisis was building for years before showing any signs and was fed by lending, securitization, leveraging, and housing booms.</p> Read More

  • Foreclosure Metrics

    Timothy Dunne Guhan Venkatu


    <p>As the foreclosure crisis deepens, increased attention is being paid to foreclosure statistics, which are often used to judge the intensity of foreclosure problems both within and across regions. However, these statistics need to be interpreted carefully; different foreclosure statistics embed different information, and making informative comparisons with various metrics requires understanding how each is constructed.</p> Read More

  • Replacing the Dollar with Special Drawing Rights - Will It Work This Time?

    Owen F. Humpage


    <p>The head of China&rsquo;s central bank is calling for countries to replace the U.S. dollar as an international reserve currency with something called SDRs. Created by the IMF way back in 1969 for that purpose, SDRs never caught on. While SDRs may be declared an official international reserve asset today, they are not likely to become the world&rsquo;s key international currency anytime soon. In the meantime, countries in China&rsquo;s current predicament&mdash;acquiring more dollars than they think prudent&mdash;could avoid such risks in the future by allowing their currencies to appreciate.</p> Read More

  • Effective Practices in Crisis Resolution and the Case of Sweden

    Kent Cherny O. Emre Ergungor


    <p>The current financial crisis is a painful reminder that the developed world is not yet immune to these devastating shocks. But while we haven&rsquo;t learned to prevent them, we have learned some lessons about what is necessary to contain them once they begin and to limit the damage that follows. As policymakers worldwide focus on resolving the current financial crisis, they might look to Sweden as a useful model for effective strategies.</p> Read More

  • Adjustable-Rate Mortgages and the Libor Surprise

    Mark E. Schweitzer Guhan Venkatu


    <p>Adjustable-rate mortgages have typically been tied to either of two indexes, one based on U.S. treasuries, the other on the London interbank offered rate, or Libor. The index is used to determine a mortgage&rsquo;s new interest rate when it is reset, and up until recently, the choice would have made little difference. But since 2007, the rates on which the indexes are based have diverged sharply, and borrowers with Libor-based adjustable-rate mortgages are likely to pay more than they would have had their mortgages been tied to treasuries. Moreover, the proportion of Libor-based ARMs has increased significantly, especially for subprime loans.</p> Read More