SNAP: should we be worried about a sudden, sharp rise from low, long-term rates?
Despite the expectations of FOMC and market participants at the beginning of 2014 to the contrary, the yield on 10-year U.S. Treasury debt declined by about 50 basis points from 2.72 percent at the beginning of 2014 to 2.17 percent as of December 22, 2014. This raises the worrisome possibility that we might observe a sudden change in longer-term yields once the Federal Reserve announces an increase in short-term rates. In other words, longer-term rates could snap, very much as they did in the summer of 2013 after the tapering announcement, once the Fed announces its first short-term rate hike indicating the end of the era of loose monetary policy. In order to study this possibility, this paper examines reactions to Fed announcements during the period when conventional monetary policy tools were used, to investigate whether FOMC announcements that imply reversals in the monetary policy stance have a greater effect on longer-term Treasury yields than similar monetary policy actions that do not imply a policy reversal.
AUTHORS: Ozdagli, Ali K.
Costs and benefits of building faster payment systems: the U.K. experience and implications for the United States
This paper studies the economic cost-benefit analysis behind the decision by the United Kingdom on how to implement its Faster Payments Service (FPS), which allows consumers and businesses to rapidly transfer money between bank accounts, and draws implications for the U.S. payments system.
AUTHORS: Rysman, Marc; Schuh, Scott; Greene, Claire; Shy, Oz
How do speed and security influence consumers' payment behavior?
The Federal Reserve Financial Services (FRFS) strategic plan for 2012-2016 named improvements in the end-to-end speed and security of the payment system as two of its policy initiatives. End-to-end in this context means that for the first time end-users are explicitly included. Earlier versions of the strategy plan were circulated for public comment, and the feedback received by FRFS specifically identified a need for further research. This brief draws upon new data from the 2013 Survey of Consumer Payment Choice and employs econometric modeling and simulation to complement FRFS-commissioned market research on end users' preferences. The authors' approach relies on revealed preference to incorporate insight into consumers' actual behavior, not just their attitudes, and their models employ a two-stage technique, estimating, first, the influence of the simulated improvements in speed and in security on the adoption of the payment instruments considered, and, second, the influence on the choice of which of the adopted payment instruments to use. The final version of the strategic plan is currently under discussion by Federal Reserve policymakers, so all the policies and strategies discussed in this brief are preliminary.
AUTHORS: Schuh, Scott; Stavins, Joanna
Bitcoin as money?
The spectacular rise late last year in the price of Bitcoin, the dominant virtual currency, has attracted much public attention as well as scholarly interest. This policy brief discusses how some features of Bitcoin, as designed and executed to date, have hampered its ability to perform the functions required of a fiat money??as a medium of exchange, unit of account, and store of value. Furthermore, we document how various forms of intermediaries have emerged and evolved within the Bitcoin network, particularly noting the convergence toward concentrated processing, both on and off the blockchain. We argue that much of this process would have been predicted by established theories of financial intermediation, and we consider the theories? implication for the future evolution of intermediaries serving users of Bitcoin or alternative virtual currencies. We then compare Bitcoin with other innovations to facilitate payment services, from competing alternative digital currencies to electronic payment protocols. We conclude with a broad consideration of the major factors that will likely shape the future development of Bitcoin versus other alternative payment systems. We predict that Bitcoin?s lasting legacy will be the innovations it has spurred to payment technology, although the payment system will remain dominated by large processors because of economies of scale.
AUTHORS: Lo, Stephanie; Wang, J. Christina
Productivity in the slow lane?: the role of information and communications technology
As the current recovery matures in the United States, evidence is mounting that total factor productivity (TFP), the typical measure of technological change, has moved back into the slow lane. This study uses industry data to explore the extent to which the acceleration in TFP in the late 1990s and early 2000s and the subsequent deceleration are attributable to unmeasured investment by firms to take full advantage of the new capabilities made possible by information and communications technology (ICT).
AUTHORS: Pearson, Alison; Wang, J. Christina
The emerging market economies in times of taper-talk and actual tapering
The emerging market economies (EME) experienced financial distress during two recent periods, both linked to the prospect of the Federal Reserve starting to slow its asset purchases. This policy change was expected to reverse the capital flows directed to the EME. Despite this aggregate effect, a closer analysis shows that there were significant differences across the EME during the time when talk of the upcoming taper began and the period when the policy was implemented. The author makes use of the literature on currency crises to analyze the different cross-country responses and to identify a potential crisis period in the near future, defined as the next 24 months.
AUTHORS: Diez, Federico J.
Let's talk about it: what policy tools should the Fed \\"normally\\" use?
During the onset of a very severe financial and economic crisis in 2008, the federal funds rate reached the zero lower bound (ZLB). With this primary monetary policy tool therefore rendered ineffective, in November 2008 the Federal Reserve started to use its balance sheet as an alternative policy tool when it began the large-scale asset purchases. Now attention is turning to how the Fed should transition back to a more conventional monetary policy stance. Largely missing from these discussions about the Fed's "exit strategy" is a consideration that perhaps it should retain, not discard, the balance sheet tools. Since the Dodd-Frank Act (DFA) has added maintaining financial stability to the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price stability, it might be beneficial to have several tools to achieve multiple policy objectives. An additional consideration is that some of these tools may be needed to stem future crises as a result of the DFA's new limitations on how the Fed can provide liquidity under such adverse circumstances. In an effort to spur a broader debate, this brief discusses what is known and knowable regarding the effectiveness of balance sheet tools and examines four primary arguments for keeping these as part of the Fed's toolkit.
AUTHORS: Barnes, Michelle L.
Global standards for liquidity regulation
Liquidity risk has received increased attention recently, especially in light of the 2007 - 2009 financial crisis, when banks' extensive reliance on short-term funding, maturity mismatches between assets and liabilities, and insufficient liquidity buffers made them quite susceptible to liquidity risk. To mitigate such risk, the Basel Committee on Banking Supervision (BCBS) introduced an improved global capital framework and new global liquidity standards for banks in December 2010 in the form of the new Basel Accord (Basel III). This brief offers insights from the crisis experience, identifies the problems that the new liquidity regulation aims to address, and summarizes underlying differences between the United States and Europe that may affect the ability to design and implement consistent global standards.
AUTHORS: Liebmann, Eva; Peek, Joe
Did abnormal weather affect U.S. employment growth in early 2015?
A current policy concern centers on how the severe winter weather experienced in some parts of the country may have affected the economy earlier this year. As of 2015:Q1, monthly payroll growth has slowed by more than 100,000 jobs compared to 2014:Q4, while GDP declined at an annual rate of 0.7 percent. To measure the potential effect of weather on recent employment growth, the author estimates a regression model using state-level employment and weather data from 1981 onward. The coefficients from this model are combined with data on recent weather to generate an estimate of how weather is likely to have affected employment growth earlier this year. The specification of the regression model builds on some recent research by Boldin and Wright (2015), who show that abnormal weather is likely to have the biggest effect on employment if it occurs on or just before the 12th day of each month, due to the timing conventions of the government's employment surveys.
AUTHORS: Foote, Christopher L.
Informal work in the United States: evidence from survey responses
"Informal" work refers to temporary or occasional side jobs from which earnings are presumably not reported in full to the Internal Revenue Service and which typically do not constitute a dominant or complete source of income. Perhaps the most important reason for undertaking informal work is to offset negative income and employment shocks, such as reduced hours in a formal job, stagnant wages, or involuntary unemployment. Such negative shocks affected many Americans during the Great Recession, so it is important to determine the extent to which people engaged in informal work during this sustained downturn and how much it helped them economically. New web-based applications (such as Uber) that facilitate a variety of informal earnings opportunities mean that more people may undertake informal work. The authors designed the Boston Fed's Survey of Informal Work Participation (SIWP) to identify the types of individuals who undertake in such activities, how much they earn, their current employment status, how they rate the value of informal work in helping to offset negative shocks, and to explore how the Internet and mobile applications have facilitated the opportunities for engaging in informal paid work via the "peer-to-peer" economy.
AUTHORS: Burke, Mary A.; Bracha, Anat