Do commodity price spikes cause long-term inflation?
This public policy brief examines the relationship between trend inflation and commodity price increases and finds that evidence from recent decades supports the notion that commodity price changes do not affect the long-run inflation rate. Evidence from earlier decades suggests that effects on inflation expectations and wages played a key role in whether commodity price movements altered trend inflation. This brief is based on a memo to the president of the Federal Reserve Bank of Boston as background to a meeting of the Federal Open Market Committee.
AUTHORS: Tootell, Geoffrey M. B.
The estimated macroeconomic effects of the Federal Reserve's large-scale Treasury purchase program
This brief examines an issue of current importance to the conduct of U.S. economic policy: how has the Federal Open Market Committee (FOMC) plan to purchase up to $600 billion of Treasury securities by June 30, 2011 affected the movement of inflation, GDP, and employment to more desirable medium-term and long-term levels? Following the FOMC's announcement of the plan on November 3, 2010, other events that potentially influence Treasury yields have been at play. To estimate the effects that the FOMC Treasury purchases may have on the goal of achieving more desirable levels of inflation and employment, the authors make use of different models to gauge the likely effect upon interest rates, the interest rate effects on real spending (GDP), and how changes in GDP may be affecting the employment rate.
AUTHORS: Olivei, Giovanni P.; Fuhrer, Jeffrey C.
Potential effects of an increase in debit card fees
Recently announced changes to debit card interchange fees could lead to an increase in the cost of debit cards to consumers. This brief analyzes the potential effects of an increase in debit card fees or in bank account fees by using the results of the 2008 and 2009 Survey of Consumer Payment Choice (SCPC). The main findings are that: 1) consumers with the least amount of education (less than a high school diploma), the lowest annual income (below $25,000), and the youngest age (under 25 years) consider cost to be the most important payment characteristic. It is probable that these consumers would be most affected by an increase in debit card fees, and most likely to change their payment behavior in response; 2) the cost of debit seems to be an important factor affecting consumer payment decisions: consumers who rated the cost of debit cards as low relative to the cost of other payment methods were significantly more likely to adopt and to use debit cards; 3) credit cards were viewed as the closest substitute for debit cards. If the cost of using debit cards rises, consumers are more likely to substitute credit cards for some of their debit card transactions; 4) consumer reaction depends on the type of fee increases: an increase in the cost of debit cards specifically is expected to have a greater effect on debit card use than a broader increase in the cost of maintaining bank accounts; and 5) an increase in the one-time cost of debit card setup could lead to a substantial decrease in the rate of debit adoption.
AUTHORS: Stavins, Joanna
Using state and metropolitan area house price cycles to interpret the U. S. housing market
This brief examines the numerous house price cycles in states and metropolitan areas since the 1970s, drawing lessons that may be informative for analyzing and projecting national patterns. It finds that house sales volumes, new home construction, and mortgage delinquencies have provided leading indicators when a statewide house price boom was nearing an end, but that house prices have rarely decreased in the absence of a state recession. The median relationship suggests that the national OFHEO house price index could keep increasing well into 2007, given the sales and construction declines and the increases in delinquencies observed to date, and absent other factors that weaken the economy. However, the lead-lag relationships have varied considerably across states and time periods, indicating that turning points in house prices are difficult to predict precisely. ; Next, the brief examines the empirical relationship between metropolitan-area house prices and measures of their deviation from justifiable values, as derived from economic models. It finds that the probability of a house price decline in metropolitan areas has depended on both the extent to which housing was overvalued two to three years earlier and on changes in market fundamentals that affect housing. An extrapolation of these results suggests that national house price increases are likely to be approximately flat for the remainder of 2006. Estimates for 2007 vary, depending on assumptions regarding mortgage interest rates, personal incomes, and apartment rents, and on one?s views on how such factors influence housing markets. In addition, the brief also cautions that the economic models developed to date provide only partial explanations of past house price movements. ; On the whole, the results can be interpreted as adding support for the view that average U.S. house prices are likely to be fairly flat in 2006 and 2007. Because house prices are subject to inexplicable movements, this conclusion should be viewed as a plausible extrapolation using historical evidence rather than a forecast. An additional caveat is that mortgage markets and other institutional factors may have changed sufficiently so as to alter the relationship between house prices and the economy compared with what existed in past cycles.
AUTHORS: Gerew, Nelson; Kodrzycki, Yolanda
Inflation expectations and the evolution of U. S. inflation
Much recent commentary has centered on the importance of well-anchored inflation expectations serving as the foundation of a well-behaved inflation rate. But the difficulty in relying on this principle is that inflation expectations are not directly observable, and thus it is hard to know whether expectations truly play such an anchoring role in the evolution of inflation. In the current circumstances this question is of much more than academic interest, as widely used measures suggest the coincidence of a large unemployment gap and muted production costs with fairly stable long-run inflation expectations. While a high unemployment rate would tend to depress inflation, lower production costs may serve as a counterweight to downward pressure. Which effect will prevail? This brief examines the role of expectations and anchoring by employing expectations proxies derived from surveys of professional forecasters. The brief concludes that there is some evidence that stable long-run expectations have an indirect anchoring effect on inflation, but that to date the effect on resource slack remains considerable.
AUTHORS: Fuhrer, Jeffrey C.
Inflation targeting: central bank practice overseas
This policy brief, which is based on an internal memo, summarizes the institutional and operational features observed in the 27 countries that have gained experience with inflation targeting (IT). It finds considerable convergence in many IT practices across countries over the past 10 to 15 years but much variation in policymakers? choices concerning such key issues as how they treat the borders of the target range. On the whole, most IT banks have chosen to practice inflation targeting in a more flexible and, thus, resilient fashion than many analysts once feared?seemingly without much loss of credibility. Currently, however, after a prolonged period of rapidly rising commodity and asset prices, followed by a period of sharp oil and asset price declines, IT is clearly facing the greatest challenges in its short history of relatively widespread use. Fortunately, one key lesson that emerges from our experience to date is that much of the ability of inflation targeting to help moor inflation expectations likely stems from the premium it places on improving transparency standards. These standards are available to all central banks, whether they choose to practice inflation targeting or not.
AUTHORS: Little, Jane Sneddon; Romano, Teresa Foy
Measurement of unemployment
Measures of unemployment tally people without a job who are looking for one. For measurement purposes, the critical question is what constitutes ?looking.? This article summarizes how unemployment is measured in the United States and Europe, and describes recent research investigating the permeability of the dividing line between the unemployed and ?marginally attached? subgroups of those out of the labor market. A continuum between unemployed and entirely inactive individuals indicates that measures beyond unemployment may be useful in judging the state of the labor market.
AUTHORS: Bradbury, Katharine L.
Cyclical versus secular: decomposing the recent decline in U.S. labor force participation
Since the start of the Great Recession, one of the most striking developments in the U.S. labor market has been the pronounced decline in the labor force participation rate. The crucial issue in interpreting the decline in U.S. labor force participation is how much of the decline reflects cyclical factors and how much reflects more persistent developments such as the demographic effects of an aging population. We provide a decomposition of cyclical versus trend movements in the labor force participation rate, informed by the joint dynamics of this variable with the employment-to-population ratio. We find that since 2008 trend movements account for a significant portion of the decline in labor force participation. The cyclical response of the labor force participation rate over most of the Great Recession and ensuing recovery has been smaller than usual given the estimated cyclical behavior of the employment-to-population ratio. If the cyclical behavior of the labor force participation rate had followed historical norms, the unemployment rate over the period 2009?2011 would have been lower on average by roughly three-quarters of one percentage point. At this point, however, the unemployment rate should provide a fairly accurate signal of labor market conditions and further cyclical declines in labor force participation rates are unlikely to occur if the employment situation continues to improve.
AUTHORS: Olivei, Giovanni P.; Barnes, Michelle L.; Gumbau-Brisa, Fabia
A decomposition of shifts of the Beveridge curve
The apparent outward shift of the Beveridge curve?the empirical relationship between job openings and unemployment?has received much attention among economists and policymakers in the recent years with many analyses pointing to extended unemployment benefits as a reason behind the shift. However, other explanations have also been proposed for this shift, including worsening structural unemployment. ; If the increased availability of unemployment insurance (UI) benefits to the long-term unemployed is responsible for the shift in the Beveridge curve, then allowing these benefits to expire should move many of the long-term unemployed back to work (or out of the labor force). ; Evidence from decomposing the job openings and unemployment relationship using data on unemployed persons by reason of unemployment shows that a significant portion of the outward shift in the Beveridge curve is concentrated among new entrants and unemployed re-entrants?those generally not eligible to collect regular or extended benefits. The decomposition reveals that at most half of the shift in the aggregate Beveridge curve is attributable to the disincentive effects of unemployment benefit programs.
AUTHORS: Ghayad, Rand
The federal fiscal outlook
This Public Policy Brief presents recent forecasts of the U.S. federal government deficits and publicly held federal debt, along with brief commentary by economic research staff at the Federal Reserve Bank of Boston. It is based on materials presented in an internal policy briefing on April 29, 2004. Contributors to this brief include Radoslav Raykov and Robert Triest. Views expressed in this brief do not necessarily reflect the views of the Federal Reserve System.