Commentary on Trends in the aggregate labor force

Labor supply

Monetary policy and learning: Some implications for policy and research

In March 2003 the Federal Reserve Bank of Atlanta hosted a conference focusing on the relationship between monetary policy and learning. The conference papers and discussions are part of an emerging literature that introduces learning-about the economy or the model used by policymakers-into dynamic macroeconomic models. In some models, monetary policymakers learn about how the economy works while in others private agents learn about the model(s) the central bank uses to formulate monetary policy. ; This article outlines key issues, raised in a 1999 book by Thomas Sargent, about how to interpret monetary policy behavior and economic performance over the past thirty years using the Phillips curve framework and different assumptions about learning. To a large extent, several conference papers follow from Sargent's work. Some conference papers focus on understanding recent inflation history, attempting to detect monetary policy's role in generating the recent, more benign inflation performance. Other conference papers investigate the role of learning behavior in a variety of settings. The article outlines the implications from some of the papers. ; Finally, the article describes economic literature relating to central bank transparency, its relevance for effective communication to the public about monetary policy, and its likely role in future learning models. Through the transparency discussion, the article foreshadows Lars Svensson's keynote address at the conference (reprinted here), citing it as a "suggested user's guide for monetary policymakers to improve policy effectiveness."Monetary policy

Money demand and relative prices during episodes of hyperinflation

Inflation (Finance) ; Money ; Prices

Financial aggregates as conditioning information for Australian output and inflation

This paper examines whether financial aggregates provide information useful for predicting real output growth and inflation, extending the inquiry conducted in Tallman and Chandra (1996). First, we investigate whether perfect knowledge of the future values of financial aggregates helps improve significantly the forecasting accuracy of output and inflation in a simple vector autoregression framework. The results display only one notable improvement to the forecasts with the addition of perfect information on the financial aggregates—future information on credit growth helps improve the prediction accuracy of real output growth. The improvement is most noticeable during the early 1990s recession. Second, we test whether the financial aggregates are important explanators within single-equation models that are more rigorously fitted to the data. We find only one instance in which an aggregate helps explain the variation in either real output growth or inflation—that is, the growth in credit helps explain the growth in real output in a particular specification of the output model. This finding, though, is sensitive to the choice of foreign output proxy. In sum, we conclude that while credit may have some useful information in times of financial restructuring it is unlikely that there is information in financial aggregates that is exploitable systematically for predicting either real output growth or inflation.Australia ; Credit ; Financial markets ; Vector autoregression

Liquidity creation without a lender of last resort: clearinghouse loan certificates in the Banking Panic of 1907

We employ a new data set comprised of disaggregate figures on clearinghouse loan certificate issues in New York City to document how the dominant national banks were crucial providers of temporary liquidity during the Panic of 1907. Clearinghouse loan certificates were essentially "bridge loans" arranged between clearinghouse members that enabled and were issued in anticipation of monetary gold imports, which took a few weeks to arrive. The large New York City national banks acted as private liquidity providers by requesting (and the New York clearinghouse issuing) a volume of clearinghouse loan certificates beyond their own immediate liquidity needs. While loan certificates were a temporary solution at best to the liquidity crisis in 1907, their issuance allowed the New York banks to serve their role as central reserve city banks in the national banking system.

Why didn't the United States establish a central bank until after the panic of 1907?

Monetary historians conventionally trace the establishment of the Federal Reserve System in 1913 to the turbulence of the Panic of 1907. But why did the successful movement for creating a U.S. central bank follow the Panic of 1907 and not any earlier National Banking Era panic? The 1907 panic displayed a less severe output contraction than other national banking era panics, and national bank deposit and loan data suggest only a limited impairment to intermediation through these institutions. ; We argue that the Panic of 1907 was substantially different from earlier National Banking Era panics. The 1907 financial crisis focused on New York City trust companies, a relatively unregulated intermediary outside the control of the New York Clearinghouse. Yet trusts comprised a large proportion of New York City intermediary assets in 1907. Prior panics struck primarily national banks that were within the influence of the clearinghouses, and the private clearinghouses provided liquidity to member institutions that were perceived as solvent. Absent timely information on trusts, the New York Clearinghouse offered insufficient liquidity to the trust companies to quell the panic quickly. ; In the aftermath of the 1907 panic, New York bankers saw heightened danger to the financial system arising from "riskier" institutions outside of their clearinghouse and beyond their direct influence. The reform proposals from New York banking interests advocated universal membership in a centralized reserve system to overcome the risk of financial panic arising from the observed isolation of some intermediaries. Serious consideration of federal legislation to reform the banking system took place because New York bankers changed in their attitude toward a system of reserves beyond their control.Banks and banking - History ; Banks and banking, Central

Liquidity creation without a lender of last resort: clearing house loan certificates in the Banking Panic of 1907

We employ a new data set comprised of disaggregate figures on clearing house loan certificate issues in New York City to document how the dominant national banks were crucial providers of temporary liquidity during the Panic of 1907. Clearing house loan certificates were essentially “bridge loans” arranged between clearing house members. They enabled and were issued in anticipation of gold imports, which took a few weeks to arrive. The large, New York City national banks acted as private liquidity providers by requesting (and the New York Clearing House issuing) a volume of clearing house loan certificates beyond their own immediate liquidity needs, in accord with their role as central reserve city banks in the national banking system.Financial crises - United States ; Lenders of last resort

Lessons from the panic of 1907

Depressions ; Banks and banking - History

Banking and financial crises in United States history: what guidance can history offer policymakers?

This paper assesses the validity of comparisons between the current financial crisis and past crises in the United States. We highlight aspects of two National Banking Era crises (the Panic of 1873 and the Panic of 1907) that are relevant for comparison with the Panic of 2008. In 1873, overinvestment in railroad debt and the default of railroad companies on that debt led to the failure of numerous brokerage houses, precursor to the modern investment bank. During the Panic of 1907, panic-related deposit withdrawals centered on the less regulated trust companies, which had only indirect access to the existing lender of last resort, similar to investment banks in 2008. The popular press has made numerous references to the banking crises of the Great Depression as relevant comparisons to the recent crisis. This paper argues that such an analogy is inaccurate. The previous banking crises in U.S. history reflected widespread depositor withdrawals whereas the recent panic arose from counterparty solvency fears and large counterparty exposures among large complex financial intermediaries. In historical incidents, monitoring counterparty exposures was standard banking practice and the exposures were smaller. From this perspective, the lessons from the past appear less directly relevant for the current crisis.Financial crises - United States ; Systemic risk

Prior parameter uncertainty: Some implications for forecasting and policy analysis with VAR models

Models used for policy analysis should generate reliable unconditional forecasts as well as policy simulations (conditional forecasts) that are based on a structural model of the economy. Vector autoregression (VAR) models have been criticized for having inaccurate forecasts as well as being difficult to interpret in the context of an underlying economic model. In this paper, we examine how the treatment of prior uncertainty about parameter values can affect forecasting accuracy and the interpretation of identified structural VAR models. ; Typically, VAR models are specified with long lag orders and a diffuse prior about the unrestricted coefficients. We find evidence that alternatives that emphasize nonstationary aspects of the data as well as parsimony in parameterization have better out-of-sample forecast performance and smoother and more persistent responses to a given exogenous monetary policy change than do unrestricted VARs.Forecasting ; Vector autoregression ; Econometric models