International capital flows and the returns to safe assets in the United States 2003-2007.

A broad array of domestic institutional factors –including problems with the originate-to-distribute model for mortgage loans, deteriorating lending standards, deficiencies in risk management, conflicting incentives for the government-sponsored enterprises (GSEs), and shortcomings of supervision and regulation– were the primary sources of the US housing boom and bust and the associated financial crisis. In addition, the extended rise in US house prices was likely also supported by long-term interest rates (including mortgage rates) that were surprisingly low, given the level of short-term rates and other macro fundamentals –a development that Greenspan (2005) dubbed a “conundrum.” The “global saving glut” (GSG) hypothesis (Bernanke, 2005 and 2007) argues that increased capital inflows to the United States from countries in which desired saving greatly exceeded desired investment –including Asian emerging markets and commodity exporters– were an important reason that US longer-term interest rates during this period were lower than expected. This essay investigates further the effects of capital inflows to the United States on US longer-term interest rates; however, we look beyond the overall size of the inflows emphasised by the GSG hypothesis to examine the implications for US yields of the portfolio preferences of foreign creditors. We present evidence that, in the spirit of Caballero and Krishnamurthy (2009), foreign investors during this period tended to prefer US assets perceived to be safe. In particular, foreign investors –especially the GSG countries–acquired a substantial share of the new issues of US Treasuries, Agency debt, and Agency-sponsored mortgage-backed securities. The downward pressure on yields exerted by inflows from the GSG countries was reinforced by the portfolio preferences of other foreign investors. We focus particularly on the case of Europe: although Europe did not run a large current account surplus as did the GSG countries, we show that it leveraged up its international balance sheet, issuing external liabilities to finance substantial purchases of apparently safe US “private label” mortgage-backed securities and other fixed-income products. The strong demand for apparently safe assets by both domestic and foreign investors not only served to reduce yields on these assets but also provided additional incentives for the US financial services industry to develop structured investment products that “transformed” risky loans into highly-rated securities. Our findings do not challenge the view that domestic factors, including those listed above, were the primary sources of the housing boom and bust in the United States. However, examining how changes in the pattern of international capital flows affected yields on US assets helps provide a deeper understanding of the origins and dynamics of the crisis.

By the numbers: Data and measurement in community economic development

In a speech to the Greenlining Institute, Federal Reserve Board Chairman Ben S. Bernanke speaks to the need for developing and analyzing social and economic data at the local level to do the following: uncover new investment opportunities; provide transparency and promote good governance and sound public policies; and promote independent policy research.

Housing, housing finance, and monetary policy: a symposium sponsored by the Federal Reserve Bank of Kansas City: opening remarks

Housing ; Housing - Prices ; Business cycles ; Monetary policy

By the numbers: data and measurement in community economic development

Highlights of a speech by Federal Reserve Chairman Ben S. Bernanke at the Greenlining Institute’s 13th Annual Economic Development Summit in Los Angeles, April 20, 2006.Community development

Adjustment Costs, Durables, and Aggregate Consumption

Previous tests of the permanent income hypothesis (PIH) have focused on either nondurables or durables expenditures in isolation. This paper studies consumer purchases of nondurables and durables as the outcome of a single optimization problem.It is shown that the presence of adjustment costs of changing durables stocks may substantially affect the time series properties of both components of expenditure under the PIH.However, econometric tests based on this model do not contradict earlier rejections of the PIH in aggregate quarterly data.

Irreversibility, Uncertainty, and Cyclical Investment

The optimal timing of real investment is studied under the assumptions that investment is irreversible and that new information about returns is arriving over time. Investment should be undertaken in this case only when the costs of deferring the project exceed the expected value of information gained by waiting. Uncertainty, because it increases the value of waiting for new information, retards the current rate of investment. The nature of investor's optimal reactions to events whose implications are resolved over time is a possible explanation of the instability of aggregate investment over the business cycle.

The Macroeconomics of the Great Depression: A Comparative Approach

Recently, research on the causes of the Great Depression has shifted from a heavy emphasis on events in the United States to a broader, more comparative approach that examines the interwar experiences of many countries simultaneously. In this lecture I survey the current state of our knowledge about the Depression from a comparative perspective. On the aggregate demand side of the economy, comparative analysis has greatly strengthened the empirical case for monetary shocks as a major driving force of the Depression; an interesting possibility suggested by this analysis is that the worldwide monetary collapse that began in 1931 may be interpreted as a jump from one Nash equilibrium to another. On the aggregate supply side, comparative empirical studies provide support for both induced financial crisis and sticky nominal wages as mechanisms by which nominal shocks had real effects. Still unresolved is why nominal wages did not adjust more quickly in the face of mass unemployment.

Monetary Policy and Asset Price Volatility

We explore the implications of asset price volatility for the management of monetary policy. We show that it is desirable for central banks to focus on underlying inflationary pressures. Asset prices become relevant only to the extent they may signal potential inflationary or deflationary forces. Rules that directly target asset prices appear to have undesirable side effects. We base our conclusions on (i) simulation of different policy rules in a small scale macro model and (ii) a comparative analysis of recent U.S. and Japanese monetary policy.

Monetary policy and asset price volatility

Over the past twenty years the world's major central banks have been largely successful at bringing inflation under control. While it is premature to suggest that inflation is no longer an issue of great concern, it is quite conceivable that the next battles facing central bankers will lie on a different front. One development that has already concentrated the minds of policymakers is an apparent increase in financial instability, of which one important dimension is increased volatility of asset prices.> In a presentation at the Federal Reserve Banks of Kansas City's 1999 symposium, "New Challenges for Monetary Policy," Bernanke and Gertler examined the role that asset prices should play in monetary policy. They concentrated on three issues: why policymakers should care about asset price volatility, how asset price volatility affects the economy, and how monetary policy should respond to changes in asset prices.Monetary policy ; Banks and banking, Central