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2010 Economic Commentaries

  • The Effect of Falling Home Prices on Small Business Borrowing

    Mark E. Schweitzer Scott Shane


    <p>Small businesses continue to report problems obtaining the financing they need. Because small business owners may rely heavily on the value of their homes to finance their businesses (through mortgages or home equity lines), the fall in housing prices might be one of the causes of their difficulty. We analyze information from a variety of sources and find that homes do constitute an important source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances.</p> Read More

  • Simple Ways to Forecast Inflation: What Works Best?

    Mehmet Pasaogullari Brent Meyer


    There are many ways to forecast the future rate of inflation, ranging from sophisticated statistical models involving hundreds of variables to hunches based on past experience. We generate a number of forecasts using a simple statistical model and an even simpler estimating rule, adding in various measures thought to be helpful in predicting the course of inflation. Then we compare their forecast accuracy. We find that no single specification outperforms all others over all time periods. For example, the median and 16 percent trimmed-mean measures outperform all other specifications during the 1990s, and survey-based inflation expectations seem to do better during volatile periods. Read More

  • W(h)ither the Fed's Balance Sheet?

    John Carlson Joseph G. Haubrich John Lindner


    <p>The Federal Reserve balance sheet&rsquo;s size and composition have changed dramatically since September 2008. Federal&nbsp;Reserve policymakers have expressed their support for eventually shrinking the Fed&rsquo;s balance sheet and returning the&nbsp;composition of its securities portfolio to include only U.S. Treasury issues. Through the careful study of public Federal&nbsp;Open Market Committee documents, this Economic Commentary concisely explains some of the FOMC&rsquo;s decisions&nbsp;concerning an appropriate sequence of policy actions.</p> Read More

  • Your Credit Score Is a Ranking, Not a Score

    Yuliya Demyanyk


    <p>With credit scores affecting so many important aspects of our lives, it’s no wonder that people are concerned with improving their scores. Once they start to paying attention to them, though, consumers often find their scores changing in unpredictable ways. Knowing that your score is not a rating of your creditworthiness but a measure of where your creditworthiness ranks relative to everyone else is the fi rst step in understanding your score and how to manage it.</p> Read More

  • The Impact of Foreclosures on the Housing Market

    Daniel Hartley


    A record number of mortgage loans are either in default or in danger of being defaulted upon. Many of the properties that back these loans will end up going through the foreclosure process. A growing body of research shows that foreclosed homes sell at a discount and that foreclosures have a negative impact on the value of other homes that are nearby. The effect on nearby property values happens for two different reasons, but my recent work suggests that one or the other predominates depending on certain characteristics of the neighborhood where the foreclosures are occurring. This finding implies that different approaches might be required to mitigate the negative effects of foreclosures in different neighborhoods. Read More

  • Out of the Shadows: Projected Levels for Future REO Inventory

    Guhan Venkatu


    <p>Nearly one homeowner in ten is more than 90 days delinquent on his mortgage payment. Most of the homes&nbsp;under these mortgages are likely to be repossessed by lenders and resold, which has led some to call them a&nbsp;shadow inventory. How much these homes will affect the broader housing market depends on when they actually&nbsp;become available for sale and how long they remain on the market. Some analysts are concerned that a surge in&nbsp;the availability of repossessed or real-estate owned (REO) properties, or a persistently high level of them, could&nbsp;put downward pressure on prices. This could, in turn, induce additional foreclosures. This Commentary presents&nbsp;three possible scenarios for future REO inventory levels.</p> Read More

  • Compensation and Risk Incentives in Banking and Finance

    Jian Cai Kent Cherny Todd Milbourn


    <p>We review why executive compensation contracts are often structured the way they are, analyze risk incentives&nbsp;stemming from various pay schemes, and examine the tendency of the banking and finance industry toward&nbsp;excessive risk-taking.</p> Read More

  • Not Your Father’s Recovery?

    Kenneth Beauchemin


    <p>There has been much talk about a disappointing recovery in the wake of the Great Recession&mdash;that this time it is much&nbsp;slower. Comparing features of this recovery to past recoveries casts some doubt on that view. The comparison is made&nbsp;using a scaled-down version of the sophisticated and powerful models that real forecasters actually use. Applying it to&nbsp;real GDP growth, unemployment, inflation, and the federal funds rate suggests that the recovery looks consistent with&nbsp;past recoveries&mdash;at least so far.</p> Read More

  • Unemployment after the Recession: A New Natural Rate?

    Murat Tasci Saeed Zaman


    <p>The past recession has hit the labor market especially hard, and economists are wondering whether some fundamentals&nbsp;of the market have changed because of that blow. Many are suggesting that the natural rate of long-term unemployment&mdash;&nbsp;the level of unemployment an economy can&rsquo;t go below&mdash;-has shifted permanently higher. We use a new measure&nbsp;that is based on the rates at which workers are finding and losing jobs and which provides a more accurate assessment&nbsp;of the natural rate. We fi nd that the natural rate of unemployment has indeed shifted higher&mdash;but much less so than has&nbsp;been suggested. Surprising trends in both the job-finding and job-separation rates explain much about the current state&nbsp;of the unemployment rate.</p> Read More

  • Is U.S. Federal Debt Too Large?

    Pedro Amaral


    <p>U.S. federal debt has grown to levels that have not been seen since the aftermath of the Second World War. Many&nbsp;economists argue there is plenty to be worried about when it comes to what this implies for the U.S. economy. This&nbsp;Economic Commentary explains that recent increases in debt are typical of the growth seen historically in times of&nbsp;crisis, but entitlement growth is a different story. Unchecked, it will impair our ability to respond to crises and economic&nbsp;downturns in the future.</p> Read More

  • Stripdowns and Bankruptcy Lessons from Agricultural Bankruptcy Reform

    Thomas J. Fitzpatrick IV James Thomson


    <p>One type of financial reform being proposed to deal with the aftermath of the housing crisis is allowing bankruptcy&nbsp;judges the authority to modify residential mortgages in a way referred to as a stripdown. The reform is seen by some as&nbsp;a partial solution to the rise in foreclosures and as a Pandora&rsquo;s box by others. But the debate is not new one. The 1980s&nbsp;farm foreclosure crisis sparked similar proposals and concerns. Congress decided to enact legislation that contained a&nbsp;stripdown provision, resulting in the creation of Chapter 12 in the bankruptcy code. The effects of Chapter 12 stripdown&nbsp;authority after its enactment shed light on the efficacy of granting bankruptcy judges similar authority for housing loans.</p> Read More

  • Is Debt Overhang Causing Firms to Underinvest?

    Filippo Occhino


    <p>Many economists have suggested that the weakness of corporate balance sheets is constraining business spending and investment, and that this in turn is impeding growth and the recovery. High levels of debt can depress spending and investment through several channels. This&nbsp;<em>Commentary</em>&nbsp;explains one of them&mdash;debt overhang can cause firms to underinvest&mdash;and points to ways in which this effect might be inhibiting the recovery.</p> Read More

  • Reforming the Over-the-Counter Derivatives Market: What’s to Be Gained?

    Kent Cherny Ben R. Craig


    <p>While derivative financial instruments have made the hedging and exchange of risk more efficient, the recent crisis showed that they also pose a substantial threat to financial stability in times of systemic turmoil. Underlying much of this threat is the lack of transparent reporting in the over-the-counter market for these instruments. This <em>Commentary</em> discusses the advantages of one solution to the transparency problem: moving the settlement or trading of derivatives to exchanges or clearinghouses.</p> Read More

  • Inflation: Noise, Risk, and Expectations

    Timothy Bianco Joseph G. Haubrich


    <p>The most frequently cited measures of inflation expectations, from TIPS-derived indicators to survey-based estimates like Blue Chip forecasts, have some inherent limitations when it comes to applying them to questions of monetary policy.</p> Read More

  • Monetary Policy in a World with Interest on Reserves

    Charles T. Carlstrom Timothy Fuerst


    <p>Banks have long been required to hold reserves equal to a percentage of their net transactions accounts (checkable deposits, for example), but until recently, they earned no interest on those reserves. The Fed now pays interest on required and excess reserve balances, having been granted the authority by Congress and putting the policy into place ahead of schedule so that it could be used to help address the financial crisis. The policy will be particularly useful when it’s time to start tightening policy and unwind the Fed’s balance sheet.</p> Read More

  • The Foreign Savings Glut: Inordinate Savers or Thriving Traders?

    Owen F. Humpage


    <p>In the years prior to our recent economic crisis, foreign savings poured into the United States. Did foreign traders who&nbsp;happened to acquire dollars from American trade defi cits merely choose to keep these funds in dollar-denominated&nbsp;assets? Or, did foreigners decide to increase their savings inordinately and place those funds in dollar-denominated assets?&nbsp;The answer is key to the debate about the sources of liquidity that paved the way to our recent economic problems.</p> Read More

  • Are Some Prices in the CPI More Forward Looking Than Others? We Think So.

    Michael Bryan Brent Meyer


    <p>&nbsp;</p> Read More

  • Are Jobless Recoveries the New Norm?

    Murat Tasci


    Recent recessions have been followed by exceptionally slow recoveries in the labor market, and the current recession is shaping up to follow the same pattern. We take a close look at some labor market measures and uncover a difference between these recent recessions and those that preceded them—workers are staying unemployed longer. This difference is a clue we can use to predict how the current labor market recovery might proceed in the near future. Read More