Idea Transcript
FEDERAL RESERVE BANK OF SAN FRANCISCO
E C O N O M IC R E S E A R C H
PUBLICATIONS
FRBSF Economic Letter
Economic analysis for a general audience 2017
What’s Down with Inflation?
2017-35
Tim Mahedy and Adam Shapiro November 27, 2017
After eight years of economic recovery, inflation remains below the FOMC’s target. Dissecting the underlying price data by spending category reveals that low inflation largely reflects prices that are relatively insensitive to overall economic conditions. Notably, modest increases in health-care prices, which have been held down by mandated cuts to the growth of Medicare payments, have helped moderate overall inflation. Further slow growth in health-care prices is likely to remain a drag on inflation.
A New Conundrum in the Bond Market?
2017-34
Michael D. Bauer November 20, 2017
When the Federal Reserve raises short-term interest rates, the rates on longer-term Treasuries are generally expected to rise. However, even though the Fed has raised short-term interest rates three times since December 2016 and started reducing its asset holdings, Treasury yields have dropped instead. This decoupling of short-term and long-term rates is reminiscent of the “Greenspan conundrum” of 2004–05. This time, however, evidence suggests compelling explanations—a lower “normal” interest rate, the risk of persistently low inflation, and fiscal and geopolitical uncertainty—may account for the yield curve flattening.
Stock Market Valuation and the Macroeconomy
2017-33
Kevin J. Lansing November 13, 2017
History suggests that extreme run-ups in the cyclically adjusted price-earnings ratio are a signal that the stock market may be overvalued. A simple regression model using a small set of macroeconomic explanatory variables can account for most of the run-up in the CAPE ratio since 2009, offering some justification for its current elevated level. The model predicts a modest decline in the ratio over the next decade. All else being equal, such a decline would imply lower stock returns relative to those in recent years when the ratio was rising.
The Perennial Problem of Predicting Potential
2017-32
John C. Williams November 6, 2017
Potential output—the maximum amount an economy can produce over the long run—is an important indicator policymakers use to gauge a country’s current economic health and expectations for future growth. However, potential output can’t be observed directly, and estimating it is difficult, even with modern, sophisticated methods. Monetary policymakers are well advised to account for the perennial problem of uncertainty surrounding these estimates in devising and carrying out policy strategies.
Missing Growth from Creative Destruction
2017-31
Pete Klenow and Huiyu Li October 23, 2017
When products disappear from the market with no substitutes from the same manufacturer, they may have been replaced by cheaper or better products from a different manufacturer. Official measurements typically approximate price changes from such creative destruction using price changes for products that were not replaced. This can lead to overstating inflation and, in turn, understating economic growth. A recent estimate suggests that around 0.6 percentage point of growth is missed per year. The bias has not increased over time, however, so it does not explain the slowdown in productivity growth.
Has the Wage Phillips Curve Gone Dormant?
2017-30
Sylvain Leduc and Daniel J. Wilson October 16, 2017
Although the labor market has steadily strengthened, wage growth has remained slow in recent years. This raises the question of whether the wage Phillips curve—the traditional relationship between labor market slack and wage growth—has weakened. Estimating a causal link from slack to wage growth using national data is difficult. However, using city-level data over the past 25 years shows that the cross-city relationship has weakened since the Great Recession. Explanations consistent with this timing suggest that the Phillips curve may return to a steeper curve in the future.
Interest Rates and the “New Normal”
2017-29
John C. Williams October 10, 2017
The Federal Reserve is moving towards more normal monetary policy, which means rising interest rates. But factors including the real natural rate of interest, a slower sustainable pace of growth, and inflation all point to a new normal where interest rates are lower than in the 1990s and early 2000s. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the Community Banking in the 21st Century Research and Policy Conference in St. Louis on October 5.
China’s Exchange Rate Policies and U.S. Financial Markets
2017-28
Thomas M. Mertens and Patrick Shultz October 2, 2017
Exchange rate stabilization or currency “pegs” are among the most prevalent interventions in international financial markets. Removing a peg to a safer currency can make the home currency more risky and less attractive to investors. When a country with market influence removes its peg from a safer country, the risk associated with holding either currency can be affected. Analyzing the effects of a scenario that changes a peg of the renminbi from the U.S. dollar to a basket of currencies suggests that China’s interest rates increase while U.S. interest rates decrease.
Demographic Transition and Low U.S. Interest Rates
2017-27
Carlos Carvalho, Andrea Ferrero, and Fernanda Nechio September 25, 2017
Interest rates have been trending down for more than two decades. One possible explanation is the dramatic worldwide demographic transition, with people living longer and population growth rates declining. This demographic transition in the United States—particularly the steady increase in life expectancy—put significant downward pressure on interest rates between 1990 and 2016. Because demographic movements tend to be long-lasting, their ongoing effects could keep interest rates near the lower bound longer. This has the potential to limit the scope for central banks to respond to future recessionary shocks.
Disappointing Facts about the Black-White Wage Gap
2017-26
Mary C. Daly, Bart Hobijn, and Joseph H. Pedtke September 5, 2017
More than half a century since the Civil Rights Act became law, U.S. workers continue to experience different levels of success depending on their race. Analysis using microdata on earnings shows that black men and women earn persistently lower wages compared with their white counterparts and that these gaps cannot be fully explained by differences in age, education, job type, or location. Especially troubling is the growing unexplained portion of the divergence in earnings for blacks relative to whites.
How Much Has Job Matching Efficiency Declined?
2017-25
Andreas Hornstein and Marianna Kudlyak August 28, 2017
During the recession and recovery, hiring has been slower than might be expected considering the large numbers of vacant jobs and unemployed individuals. This raises some concern about structural changes in the process of matching job seekers with employers. However, the standard measures account for only the unemployed and not those who are out of the labor force. Including other nonemployed groups in the measured pool of job seekers while adjusting for different job finding rates among these groups shows that the decline in matching efficiency is similar to earlier declines.
Forecasting China’s Role in World Oil Demand
2017-24
Deepa D. Datta and Robert J. Vigfusson August 21, 2017
Although China’s growth has slowed recently, the country’s demand for oil could be entering a period of faster growth that could result in substantially higher oil prices. Because Americans buy and sell oil and petroleum products in the global market, global demand prospects influence the profitability of U.S. oil producers and the costs paid by U.S. consumers. Analysis based on the global relationship between economic development and oil demand illustrates the prospects for Chinese oil demand growth and the resulting opportunities and challenges for U.S. producers and consumers.
The Natural Rate of Unemployment over the Past 100 Years
2017-23
Regis Barnichon and Christian Matthes August 14, 2017
The natural rate of unemployment, or u-star, is used by economists and policymakers to help assess the overall state of the labor market. However, the natural rate is not directly observable and must be estimated. A new statistical approach estimates the natural rate over the past 100 years. Results suggest the natural rate has been remarkably stable over history, hovering between 4.5 and 5.5% for long periods, even during the Great Depression. Recent readings on the unemployment rate have been running slightly below the natural rate estimate.
Monetary Policy’s Role in Fostering Sustainable Growth
2017-22
John C. Williams August 7, 2017
As the economy has transitioned from recovery to expansion, the role of monetary policy has shifted to sustaining the expansion by gradually moving conventional and unconventional policy back to normal. But monetary policy is reaching its limit for stimulating growth, calling for private and public sector investments and policies to step up and take the lead. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco to the Economic Club of Las Vegas in Las Vegas on August 2.
Bridging the Gap: Forecasting Interest Rates with Macro Trends
2017-21
Michael D. Bauer July 31, 2017
Interest rates are inherently difficult to predict, and the simple random walk benchmark has proven hard to beat. But macroeconomics can help, because the long-run trend in interest rates is driven by the trend in inflation and the equilibrium real interest rate. When forecasting rates several years into the future, substantial gains are possible by predicting that the gap between current interest rates and this long-run trend will close with increasing forecast horizon. This evidence suggests that accounting for macroeconomic trends is important for understanding, modeling, and forecasting interest rates.
What’s Holding Back Business Formation?
2017-20
Patrick Kiernan and Huiyu Li July 10, 2017
The pace of business start-ups in the United States has declined over the past few decades. Economic theory suggests that business creation depends on the available workforce, and data analysis supports this strong link. By contrast, the relationship between start-ups and labor productivity is less welldefined, in part because entrepreneurs face initial costs that rise with productivity, specifically their own lost income from alternative employment. Overall, policies that incorporate improving labor availability may help to boost new business growth.
The Global Growth Slump: Causes and Consequences
2017-19
John C. Williams July 3, 2017
Demographic factors like slowing population and labor force growth, along with a global productivity slowdown, are fundamentally redefining achievable economic growth. These global shifts suggest the disappointing growth in recent years is a harbinger of the future. While the causes of the growth slump are well defined, the consequences will be shaped by choices that policymakers are grappling with around the globe. The following is adapted from a presentation by the president and CEO of the Federal Reserve Bank of San Francisco at Macquarie University, Sydney, Australia, on June 27.
Has the Dollar Become More Sensitive to Interest Rates?
2017-18
John Fernald, Thomas M. Mertens, and Patrick Shultz June 26, 2017
Interest rates in the United States have diverged from the rates of other countries over the past few years. Some commentators have voiced concerns that, as a result, exchange rates might be more sensitive to unanticipated changes in U.S. interest rates now than they were historically. However, an examination of market-based measures of policy expectations finds no convincing evidence that the U.S. dollar has become more sensitive since 2014.
New Evidence for a Lower New Normal in Interest Rates
2017-17
Jens H.E. Christensen and Glenn D. Rudebusch June 19, 2017
Interest rates during the current economic recovery have been unusually low. Some have argued that yields have been pushed down by declines in longer-run expectations of the normal inflation-adjusted short-term interest rate—that is, by a drop in the so-called equilibrium or natural rate of interest. New evidence from financial markets shows that a decline in this rate has indeed contributed about 2 percentage points to the general downward trend in yields over the past two decades.
R-star, Uncertainty, and Monetary Policy
2017-16
Kevin J. Lansing May 30, 2017
Investors’ demand for safe assets tends to increase when there’s more uncertainty, as in recessions. Consistent with this idea, short-term movements in the natural rate of interest, or r-star, are negatively correlated with an index of macroeconomic uncertainty. This relationship may be relevant for assessing monetary policy. An estimated policy rule that incorporates both r-star and the uncertainty index can largely reproduce the path of the federal funds rate since 1988, except during periods when policy was constrained by the zero lower bound.
Reserve Requirements as a Chinese Macro Policy Tool
2017-15
Zheng Liu and Mark M. Spiegel May 22, 2017
China’s central bank frequently adjusts its reserve requirements for commercial banks as a way to stabilize economic fluctuations. These adjustments affect the overall credit supply but can also lead to the reallocation of credit and capital. Evidence shows that increases in reserve requirements raise offbalance-sheet lending, which typically benefits China’s more productive private sector, at the expense of on-balance-sheet loans to less productive state-owned enterprises. Under certain conditions, reserve requirements can be a useful additional policy instrument for improving resource allocations and also for macroeconomic stabilization in China.
Constructing the Home Purchase Sentiment Index
2017-14
James A. Wilcox May 15, 2017
Consumer attitudes about buying and selling homes can inform us about future housing and mortgage markets. The Home Purchase Sentiment Index (HPSI) summarizes data from the National Housing Survey on consumers’ conditions, attitudes, and intentions about housing. The HPSI shows promise both as a stand-alone indicator and as a supplement for evaluating and forecasting housing and mortgage markets. Analysis reveals the index accurately projected strong home sales in 2014 and 2015 and a weaker outlook toward the end of 2016, following the sharp rise in mortgage interest rates.
Preparing for the Next Storm: Reassessing Frameworks and Strategies in a Low R-star World 2017-13 John C. Williams May 8, 2017
Now is the right time to ask whether the monetary policy framework and strategy that worked well in the past are well suited to address the challenges ahead. A flexible price-level targeting framework has the important traits of adaptability, accessibility, and accountability. It also offers significant advantages over inflation targeting for meeting price stability and employment goals. The following is adapted from a presentation by the president and CEO of the San Francisco Fed to the Shadow Open Market Committee in New York on May 5.
Measuring Interest Rate Risk in the Very Long Term
2017-12
Jens H.E. Christensen, Jose A. Lopez, and Paul L. Mussche April 24, 2017
Insurance companies write policies to cover potential risks far into the future. Because the life of these contracts can extend well beyond the 30-year maturities for the longest U.S. Treasuries, it’s difficult to measure the interest rate risk involved. A new study describes how the long-term interest rates required to evaluate such long-lived liabilities can be extrapolated from shorter-maturity bond yields using a standard yield curve model. These extrapolations are a useful tool since they have very small errors relative to the yield curve variation typically considered for risk management.
Brexit: Whither the Pound?
2017-11
Pierre-Olivier Gourinchas and Galina Hale April 17, 2017
People of the United Kingdom voted to exit the European Union last June, a process dubbed “Brexit.” The persistent depreciation of the British pound since the vote suggests that U.K. economic conditions will be weakened over the long run following the separation from the EU. This projection of a persistent economic loss is based on the expected reversal of earlier gains from trade with other EU members and reduced cross-border labor flows.
What’s in the News? A New Economic Indicator
2017-10
Adam Hale Shapiro and Daniel J. Wilson April 10, 2017
Newspaper articles and editorials about the economy do more than just report on official data releases. They also often convey how the journalist and those interviewed feel about the economy. Researchers have recently developed ways to extract data on sentiment from news articles using text analysis and machine learning techniques. These measures of news sentiment track current economic conditions quite well. In fact, they often do a better job than standard consumer sentiment surveys at forecasting future economic conditions.
Monetary Policy Medicine: Large Effects from Small Doses?
2017-09
Òscar Jordà, Moritz Schularick, and Alan M. Taylor April 3, 2017
If inflation increases rapidly, how do we know that higher interest rates will bring prices under control? And how do we know how much of the monetary “medicine” to administer? Economics relies primarily on observational data to answer such questions, while medical research uses randomized controlled trials to evaluate treatments. Applying that method to economics, the long history of international finance turns out to be an excellent laboratory to conduct monetary experiments. These experiments suggest that interest rates have sizable effects on the economy.
Measuring Labor Utilization: The Non-Employment Index
2017-08
Marianna Kudlyak March 27, 2017
The elevated number of non-employed people who are out of the labor force has raised some concerns about how well the headline unemployment rate measures available labor. An alternative measure of labor utilization, the Non-Employment Index, accounts for all non-employed individuals, distinguishing between groups like short-term versus long-term unemployed, discouraged workers, retirees, and disabled individuals, and adjusting for how likely each is to transition to employment. Current data show the index is very close to its value in 2005–06, the period near the peak of the previous economic expansion.
How Tight Is the U.S. Labor Market?
2017-07
Regis Barnichon and Geert Mesters March 20, 2017
The U.S. unemployment rate fell to a very low level at the end of 2016, raising the question of whether the labor market has become too tight. After applying a new method to adjust for demographic changes in the labor force, the current unemployment rate is still 0.3 to 0.4 percentage point higher than at past labor market peaks. This indicates that the labor market may not be quite as tight as the headline unemployment rate suggests.
Age Discrimination and Hiring of Older Workers
2017-06
David Neumark, Ian Burn, and Patrick Button February 27, 2017
Population aging and the consequent increased financial burden on the U.S. Social Security system is driving new proposals for program reform. One major reform goal is to create stronger incentives for older individuals to stay in the workforce longer. However, hiring discrimination against older workers creates demand-side barriers that limit the effectiveness of these supply-side reforms. Evidence from a field experiment designed to test for hiring discrimination indicates that age discrimination makes it harder for older individuals, especially women, to get hired into new jobs.
Three Questions on R-star
2017-05
John C. Williams February 21, 2017
The decline in the natural rate of interest, or r-star, over the past decade raises three important questions. First, is this low level for the real short-term interest rate unique to the U.S. economy? Second, is the natural rate likely to remain low in the future? And third, is this low level confined to “safe” assets? In answer to these questions, evidence suggests that low r-star is a global phenomenon, is likely to be very persistent, and is not confined only to safe assets.
Does Growing Mismeasurement Explain Disappointing Growth?
2017-04
David Byrne, John G. Fernald, and Marshall Reinsdorf February 13, 2017
Slowing growth in U.S. productivity after 2004 is sometimes blamed on measurement problems, particularly in assessing the gains from innovation in IT-related goods and services. However, mismeasurement also occurred before the slowdown and, on balance, there is no evidence that it has worsened. Some innovations—such as free Internet services—have grown increasingly important, but they mainly affect leisure time. Moreover, the non-market benefits do not appear large enough to offset the effects of the business-sector slowdown.
Do All New Treasuries Trade at a Premium?
2017-03
Jens H.E. Christensen, Jose A. Lopez, and Patrick Shultz February 6, 2017
In the Treasury market, the most recently issued security typically trades at a higher price than more seasoned but otherwise comparable securities. The difference is known as the “on-the-run” premium. This phenomenon opens the question of whether a similar premium exists for all Treasury bonds. Examining yield spreads between pairs of inflation-protected securities, known as TIPS, that have identical maturities but different issue dates suggests that this is not the case: There is no on-the-run premium in the TIPS market at this time.
Looking Back, Looking Ahead
2017-02
John C. Williams January 23, 2017
The U.S. economy is in good shape, with the labor market at maximum employment and inflation nearing the Fed’s goal. Given the progress made on these goals and signs of continued solid momentum, it makes sense to gradually move interest rates toward more normal levels. The actual pace of increases will be driven by the evolution of economic conditions and its implications for achieving the Fed’s dual mandate objectives. The following is adapted from a speech by the president and CEO of the Federal Reserve Bank of San Francisco to the 2017 Economic Forecast in Sacramento on January 17.
How Does Business Dynamism Link to Productivity Growth?
2017-01
Huiyu Li January 9, 2017
The rate of business turnover has declined since the late 1970s, which some argue has hampered growth in innovation and productivity. This sounds like a plausible contributor to lackluster economic growth, but the connection between business turnover and productivity is more subtle. First, while business turnover has steadily declined over the past 35 years, aggregate productivity growth has not. Second, even when business starts were at historical highs, existing firms lost very little market share to new firms. This suggests that older firms are just as innovative as newcomers. 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996