Does Fed policy reveal a ternary mandate?
This paper examines the role of financial instability in setting monetary policy. The paper begins with a model that examines the interaction of monetary and regulatory policy. It then empirically tests whether financial instability has affected monetary policy. One important innovation is to construct a measure of financial instability directly related to the FOMC financial instability concerns expressed in FOMC meeting transcripts. We find that, even after controlling for forecasts of inflation and unemployment, the word counts of terms related to financial instability do correlate with ...
Is bank supervision central to central banking?
Recently, several central banks have lost their bank supervisory responsibilities, in part because it has not been shown that supervisory authority improves the conduct of monetary policy. This paper finds that confidential bank supervisory information could help the Board staff more accurately forecast important macroeconomic variables and is used by FOMC members to guide monetary policy. These findings suggest that the complementarity between supervisory responsibilities and monetary policy should be an important consideration when evaluating the structure of the central bank.
Race and mortgage lending: dissecting the controversy
Mortgage lending in Boston: a response to the critics
Three years ago, the Federal Reserve Bank of Boston released an examination of racial patterns in mortgage denial rates in the Boston area. The study was motivated by newly available data on mortgage applications, showing that black and Hispanic applicants were two to three times as likely to be turned down for mortgages as white applicants. The study gathered all the variables thought to be missing from the HMDA analysis, such as the applicants' debt burdens and credit histories, to see whether these economic factors explained the racial difference in denial rates. Although the additional ...
Restructuring, the NAIRU, and the Phillips curve
Recent news stories about corporate downsizing have increased concerns that the labor market is being permanently restructured. The press implicitly, and some economists explicitly, have concluded that this "restructuring" in the labor market has increased the rate of unemployment that is consistent with stable inflation. This rate is known as the NAIRU, the non-accelerating-inflation rate of unemployment, the unemployment rate below which inflation tends to rise, and above which inflation tends to fall. ; This article examines both macroeconomic data and more disaggregated data in search ...
Can studies of application denials and mortgage defaults uncover taste-based discrimination?
Several articles in the popular press have asserted that a simple comparison of average mortgage default rates for white and minority applicants is necessary and sufficient to uncover discrimination in mortgage lending. The fallacy of this assertion has been examined in Peterson (1981), Tootell (1993), and Yinger (1993). These papers show that a failure to account for the financial characteristics of each application or loan makes a simple comparison of average rates meaningless. However, recent empirical work on discrimination in mortgage lending has examined both application denial and ...
Investment and employment by manufacturing plants
The preceding article analyzed the determinants of investment at the macroeconomic level. In general, analysis of investment at this degree of aggregation implies that all firms in the economy react similarly to the same macro-level variables. Yet, examining macro data may obscure a great deal of variation in the forces that affect different firms, thus making quantification of the impact of these forces difficult. Since different types of firms face an array of different constraints, the authors analyze employment and investment at manufacturing plants at a finer level of distinction than ...
Empirical estimates of changing inflation dynamics
This paper provides an array of empirical evidence bearing on potentially important changes in the dynamics of U.S. inflation. We examine the overall performance of Phillips curves relative to some well-known benchmarks, the efficiency with which the Federal Reserve's Greenbook forecasts of inflation use real activity information, and shifts in the key determinants of the reduced-form "triangle model" of inflation. We develop a structural model-based interpretation of observed reduced-form shifts and conduct a reduced-form assessment of the relationship between core and headline measures of ...
Inflation dynamics when inflation is near zero
This paper discusses the likely evolution of U.S. inflation in the near and medium term on the basis of (1) past U.S. experience with very low levels of inflation, (2) the most recent Japanese experience with deflation, and (3) recent U.S. micro evidence on downward nominal wage rigidity. Our findings question the view that stable long-run inflation expectations and downward nominal wage rigidity will provide sufficient support to prices such that deflation can be avoided. We show that an inflation model fitted on Japanese data over the past 20 years, which accounts for both short- and ...
Central bank flexibility and the drawbacks to currency unification
Recently, the benefits to monetary unification have been widely heralded. Advocates of European, as well as East and West German, monetary integration point repeatedly to the advantages the United States derives from possessing a single currency. Yet, the losses resulting from this policy have too often been ignored. ; This article briefly reviews the costs and benefits of currency integration as articulated in the traditional optimal currency area literature. For the first time a full-employment model is used to examine the cost to currency unification derived from diversity among countries ...