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2015 Economic Commentaries

  • Forecasting Unemployment in Real Time during the Great Recession: An Elusive Task

    Murat Tasci Caitlin Treanor


    With the unemployment rate becoming a prominent factor in monetary policy decisions in recent years, forecasting the path of the rate in the near term has taken on a new urgency. How well do our current methods do in this task? We look at the performance of various publicly available forecasts, along with some econometric models, and evaluate their success at forecasting the unemployment rate in real time around the Great Recession. Unfortunately, the forecasting approaches we analyze performed very poorly until the beginning of the recovery. We discuss some possible reasons for this poor forecast performance. Read More

  • The Role Bank Branches Play in a Mobile Age

    Kristle Cortés


    With the increasing use of Internet and mobile banking, some analysts have been predicting the end of brick-and-mortar banks. But others maintain that branches provide bankers with invaluable information about borrowers and conditions in the local economy and are not likely to be done away with any time soon. To shed some light on the issue, I study whether financial institutions were able to make better loans during the financial crisis when they had a bank branch in the area. I find they were, which suggests their local presence gave them financially valuable information. Read More

  • Is a Nonseasonally Adjusted Median CPI a Useful Signal of Trend Inflation?

    Amy Higgins Randal J. Verbrugge


    We construct a nonseasonally adjusted version of the Cleveland Fed’s median CPI (“NSA-median”) and compare its performance as a measure of trend inflation to the median CPI and the core CPI. We investigate a month-over-month form of both median measures as well as forms with varying amounts of time aggregation. We find that both the median CPI and the NSA-median are considerably better at tracking trend inflation than the core CPI. We also find that a mere three months of time averaging is sufficient to achieve lower volatility and acceptable tracking of trend inflation. We conclude that the NSA-median is a useful signal of trend inflation and a promising candidate for further study. Read More

  • Are Millennials with Student Loans Upwardly Mobile?

    Stephan D. Whitaker


    Students have been amassing ever-growing levels of debt to attend college. The situation has raised concerns about whether the debt is high enough that the benefits of borrowing—in terms of students' future socioeconomic outcomes—are compromised. This Commentary investigates relationships between student debt, mobility, and upward social mobility. The findings suggest that student debts have not become so burdensome that they undo the advantages of higher skills. However, the advantages enjoyed by heavily indebted millennial students relative to nonborrowers have declined substantially from the advantages enjoyed by the heaviest borrowers in Generation X. Read More

  • Zero Growth and Long-Run Inequality

    Daniel R. Carroll Eric Young


    Using a basic model to study both wealth and income inequality and their relations to long-run economic growth may lead to questionable conclusions. We consider a more complex model that includes realistic variation in the levels of income and wealth across households in addition to a new ingredient, luck in each household's labor productivity. Using this model, we determine that existing estimates of the elasticity of substitution between capital and labor are generally far away from the region where inequality would explode if long-run growth were zero. Read More

  • Do Forecasters Agree on a Taylor Rule?

    Charles T. Carlstrom Margaret Jacobson


    Forecasters’ projections of interest rates vary a great deal. We use a Taylor rule to investigate two possible reasons why. Namely, do differences arise because forecasters have different projections for output growth or inflation, or do they arise because forecasters follow different guidelines to predict what the Federal Reserve will do with the federal funds rate? We find evidence for both explanations. Forecasters appear to use very different projections for inflation and output growth, but they also seem to use dramatically different Taylor rule coefficients. Read More

  • Why Has Consumption Been So Volatile in the New Millennium?

    Yuliya Demyanyk Dmytro Hryshko Daniel Kolliner María José Luengo-Prado Bent Sørensen


    US consumption has gone through steep ups and downs since the turn of the millennium, but the causes of these fluctuations are still imperfectly identified. We describe research that quantifies the relative impact of nine significant determinants of consumption growth. The explanatory power of these factors varies by period, implying that successful modelling of this decade poses many challenges. Read More

  • America’s Changing Tastes

    LaVaughn Henry


    This analysis shows that age-based consumption profiles have been affected by differences in the growth rates of real income and prices since the onset of the Great Recession in 2008. In particular, it shows that the recession caused changes in both the absolute level of households' consumption as well as the relative shares of income going to purchase necessities and luxuries, and that these changes differed by age group. It also shows that this shift occurred in spite of higher rates of price inflation for necessity goods relative to luxury items. Read More

  • Unconventional Monetary Policy Measures and Inflation Expectations

    Mehmet Pasaogullari


    The record increase in the size of the Federal Reserve's balance sheet after the financial crisis ignited fears among some people that high inflation would inevitably follow. We investigated whether those fears were supported in survey or market measures of inflation expectations around the time that large-scale asset purchases were announced. Nothing suggests that the Fed's new policy tools have been perceived by professional forecasters or financial markets as harbingers of hyperinflation. Read More

  • Paper Money and Inflation in Colonial America

    Owen F. Humpage


    Inflation is often thought to be the result of excessive money creation—too many dollars chasing too few goods. While in principle this is true, in practice there can be a lot of leeway, so long as trust in the monetary authority's ability to keep things under control remains high. The American colonists' experience with paper money illustrates how and why this is so and offers lessons for the modern day. Read More

  • Interest Rate Forecasts in Conventional and Unconventional Monetary Policy Periods

    Nelson Oliver Mehmet Pasaogullari


    Monetary policy has been conducted with a different set of tools since the financial crisis, and we investigate whether the change has affected the accuracy of professionals’ interest-rate forecasts. We analyze the accuracy of federal funds rate and nominal Treasury yield forecasts in the periods before and after the introduction of new policy tools and find that, in general, forecast accuracy improved in the latter policy period. Read More

  • Neighborhood Poverty and Quality in the Moving to Opportunity Experiment

    Dionissi Aliprantis Daniel Kolliner


    Researchers suspect that some of the disparities that exist in such outcomes as health, employment, and education might be attributable to inequality of opportunity as determined by neighborhood environments. We study census data to identify neighborhood characteristics in addition to poverty that might help to explain these disparities. We focus on the Moving to Opportunity housing-relocation experiment and show that because program participants typically moved from one predominately black neighborhood to another, their new low-poverty neighborhoods may have provided little to no change in neighborhood quality. These circumstances are helpful in understanding how results from the Moving to Opportunity program should inform views of neighborhood effects. Read More

  • Measuring Inflation Forecast Uncertainty

    Todd E. Clark Edward S. Knotek II Saeed Zaman


    Looking across a range of statistical models, we consider the likely path of future inflation and the uncertainty surrounding the models' predictions. The models suggest that inflation is on a rising path, and while inflation forecast uncertainty is somewhat elevated relative to the norms of the last 20 years, core inflation uncertainty is relatively low. For both inflation rates, forecast uncertainty is much lower as of the first quarter of 2015 than it was around the Great Recession. Read More

  • Excess Reserves: Oceans of Cash

    Ben R. Craig Matthew Koepke


    Excess reserves—cash funds held by banks over and above the Federal Reserve's requirements—have grown dramatically since the financial crisis. Holding excess reserves is now much more attractive to banks because the cost of doing so is lower now that the Federal Reserve pays interest on those reserves. The fact that banks are holding excess reserves in response to the risks and interest rates that they face suggests that the reserves are not likely to cause large, unexpected increases in bank loan portfolios. However, it is not clear what banks are likely to do in the future when the perceived conditions change. Read More

  • The Often-Ignored Regional Banking Sector

    Lakshmi Balasubramanyan Timothy Bianco


    With the focus of financial reform placed on reducing the risks associated with being "too big to fail,"; it is the nation's largest banks that have been subject to the most scrutiny. Regional banks—midsize banks with a small market share—have not warranted comparable attention. Regional banks have not been plagued by too-big-to-fail issues, but they are not without vulnerabilities. As regulation of the financial industry evolves to tailor regulatory and reporting requirements to the risks posed by different types of financial institutions, more needs to be learned about any potential risks posed by regional banks. Read More