Inequality, inflation, and central bank independence
What can account for the different contemporaneous inflation experiences of various countries, and of the same country over time? We present an analysis of the determination of inflation from a political economy perspective. We document a positive correlation between income inequality and inflation and then present a theory of the determination of inflation outcomes in democratic societies that illustrates how greater inequality leads to greater inflation, owing to a desire by voters for wealth redistribution. We conclude by showing that democracies with more independent central banks tend to ...
Transparency and Sources of Information on the Federal Reserve’s Operations, Income, and Balance Sheet
This week-long series examined the evolution of the Federal Reserve's securities portfolio and its performance over time. While the intent has been to enhance understanding of the Fed's activities, the Federal Reserve has long maintained a commitment to transparency and accountability. The historical information presented in these posts represents the work of New York Fed staff to collect portfolio-related information from annual statements and reports, most of which are public. To enhance public access, the resulting time series we compiled are being provided in downloadable Excel files ...
Do vouchers lead to sorting under random private-school selection? Evidence from the Milwaukee voucher program
This paper analyzes the impact of voucher design on student sorting in the application and enrollment phases of parental choice. More specifically, it investigates whether there are feasible ways of designing vouchers that can reduce or eliminate student sorting in these phases. Much of the existing literature investigates the question of sorting where private schools can screen students. However, the publicly funded U.S. voucher programs require private schools to accept all students unless oversubscribed and to pick students randomly if oversubscribed. This paper focuses on two crucial ...
Discounting the Long-Run
Expectations about the path of interest rates matter for many economic decisions. Three sources for obtaining information about such expectations are available. The first is extrapolation from historical data. The second consists of surveys of expectations. The third are expectations drawn from financial market prices, often referred to as market expectations. The last are usually considered to be model-based expectations, because, generally, a model is needed to reliably extract expectations from current prices. In this post, we explain the need for and usage of term structure models for ...
Some Options for Addressing Puerto Rico’s Fiscal Problems
Puerto Rico?s economic and fiscal challenges have been an important focus of work done here at the New York Fed, resulting in two reports (2012 and 2014), several blog posts and one paper in our Current Issues series in just the last few years. As the Commonwealth?s problems have deepened, the Obama administration and Congress have begun discussing potential approaches to addressing them. In this post, we update our previous estimates of Puerto Rico?s outstanding debt and discuss the effect that various forms of bankruptcy protection might have on the Commonwealth.
Helping State and Local Governments Stay Liquid
On April 9, the Federal Reserve announced up to $2.3 trillion in new support for the economy in response to the coronavirus pandemic. Among the initiatives is the Municipal Liquidity Facility (MLF), intended to support state and local governments. The details of the facility are described in the term sheet. The state and local sector is a unique but very important part of the economy. This post lays out some of the economics of the sector and the needs that the facility intends to satisfy.
The Debt Ceiling as a “Fiscal Rule”
A few months ago, the federal government was once again confronted with the need to raise the statutory limit on the amount of debt issued by the Treasury. As in the past, the protracted stalemate and associated uncertainty led to calls to eliminate the debt ceiling. In this post, I make the counterargument. Likely because of its straightforwardness, the debt ceiling has been an effective “fiscal rule.” The reduction of the federal deficit from the mid-1980s to the mid-1990s was due in large part to a series of budget compromises, all of which were accompanied by the need to raise the ...
We study the urban structure of the city of Detroit. Following several decades of decline, the city's current urban structure is clearly not optimal for its size, with a business district immediately surrounded by a ring of largely vacant neighborhoods. We propose a model with residential externalities that features multiple equilibria at the neighborhood level. In particular, developing a residential area requires the coordination of developers and residents, without which it may remain vacant even if its fundamentals are sound. We embed this mechanism in a quantitative spatial economics ...
Fiscal Policy during a Pandemic
I study the effects of the 2019-20 coronavirus outbreak in the United States and subsequent fiscal policy response in a nonlinear DSGE model. The pandemic is a shock to the utility of contact-intensive services that propagates to other sectors via general equilibrium, triggering a deep recession. I use a calibrated version of the model to analyze different types of fiscal policies. I find that UI benefits are the most effective tool to stabilize income for borrowers, who are the hardest hit, while savers may favor unconditional transfers. Liquidity assistance programs are effective if the ...
We study the urban structure of the City of Detroit. Following many decades of decline, the city?s current urban structure is clearly not optimal for its size, with a business district immediately surrounded by a ring of largely vacant neighborhoods. We propose a model with residential externalities that features multiple equilibria at the neighborhood level. In particular, developing a residential area requires the coordination of developers and residents, without which it may remain vacant even if its fundamentals are sound. We embed this mechanism in a quantitative spatial economics model ...