The gains from international risk-sharing

The author examines the data on just how much risk-sharing currently takes place in both developed and developing countries. He also considers the question of whether significant unexploited gains from risk-sharing exist across borders.Risk

Macroeconomic volatility and the equity premium

Recent empirical work documents a decline in the U.S. equity premium and a decline in the standard deviation of real output growth. We investigate the link between aggregate risk and the asset returns in a dynamic production based asset-pricing model. When calibrated to match asset return moments, the model implies that the post-1984 reduction in TFP shock volatility of 60 percent gives rise to a 40 percent decline in the equity premium. Lower macroeconomic risk post-1984 can account for a substantial fraction of the decline in the equity premium.Equity ; Macroeconomics

The macroeconomics of oil shocks

For various reasons, oil-price increases may lead to significant slowdowns in economic growth. Five of the last seven U.S. recessions were preceded by significant increases in the price of oil. In “The Macroeconomics of Oil Shocks,” Keith Sill examines the effect of changes in oil prices on U.S. economic activity, focusing on how runups in the price of oil can affect output growth and inflation. He also discusses the channels by which oil-price increases might affect the economy and the historical evidence on the relationship between oil prices, economic growth, and inflation.Petroleum products - Prices

Do budget deficits cause inflation?

Keith Sill examines the theory and evidence on the link between fiscal and monetary policy and, thus, between deficits and inflation. Sill concludes that whether deficits lead to inflation depends on the extent to which a country’s monetary policy is independent.Budget deficits ; Inflation (Finance)

Inflation dynamics and the New Keynesian Phillips curve

A 1977 amendment to the Federal Reserve Act states that the Fed’s mandate is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Moderate long-term interest rates require low and stable inflation. Monetary policymakers use instruments such as a short-term interest rate to guide the economy with the aim of achieving an inflation objective. To help guide their decisions, monetary policymakers benefit from having a reliable theory of how inflation is determined, one that relates the setting of their instrument to the unexpected events that hit the economy and consequently to the rate of inflation and other economic variables. In “Inflation Dynamics and the New Keynesian Phillips Curve,” Keith Sill examines a prominent theory of how inflation is determined, as articulated in what is called the New Keynesian Phillips curve. He also investigates some of the implications of the theory for the conduct of monetary policy.Inflation (Finance) ; Phillips curve ; Unemployment

Widening the wage gap: the skill premium and technology

Our final article looks at the difference in wages between high-skill workers (such as those who might work in biotech) and low-skill workers. This skill premium has increased dramatically over the past 30 years. Although economists are still debating the causes of this increase, it seems likely that skill-biased technical change has played a large role. As companies have invested in new technologies, demand for workers who can use them has surged. In "Widening the Wage Gap: The Skill Premium and Technology," Keith Sill reviews the literature and tells us why some theories fall flat and why technology seems to be the key to the widening wage gap.Wages ; Technology ; Productivity

What accounts for the postwar decline in economic volatility?

Finally, we look at the broader picture to determine why the U.S. economy has had fewer and shorter recessions over the past 20 years. Over time, swings in the growth of many macroeconomic variables, such as gross domestic product, have become smaller. Why this decline in economic volatility? In "What Accounts for the Postwar Decline in Economic Volatility?" Keith Sill highlights some of the facts about the increased stability of the U.S. economy and assesses the contribution of policy and other factors to the decline in volatility.Recessions

News about the future and economic fluctuations

In the late 1990s, as tech-stock prices were surging, we often heard discussion about a "new economy" in which advanced communications technologies would lead to higher future productivity growth and greater economic efficiency. But the boom times largely came to a halt after August 2000, and in March 2001, the economy entered a recession that lasted eight months. Economist A.C. Pigou argued that news about the future or changes in expectations are important drivers of the business cycle. His theory seems to offer a plausible explanation of what happens in boom-bust cycles. But is his theory consistent with how modern macroeconomic models account for business cycles? In this article, Keith Sill investigates some of the empirical evidence for the economic importance of news shocks, discusses the failings of the standard macroeconomic model in accounting for the role of news in business cycles, and touches on what the news view of business cycles means for the conduct of monetary policy.Economic forecasting ; Business cycles

The economic benefits and risks of derivative securities

Certain events have raised concern about the risks associated with derivatives trading--witness Orange County, California or Procter & Gamble, both of which lost large sums of money using derivatives. However, the popular discussion often loses track of the benefits derivatives hold for firms, investors, and the economy as a whole. Have derivatives received a bum rap? Keith Sill admits that derivatives have risks, especially to the uninitiated, but they also have a great deal of value for the economy as wellDerivative securities

Forecasts, indicators and monetary policy

When setting monetary policy, should policymakers target variables such as commodity prices or interest rate spreads, which are sensitive to the market's expectations of inflation? Or are variables such as money growth, which are tied to the underlying causes of inflation and economic growth, better indicators of the economy's path? Keith Sill considers these questions as he reviews indicators past and presentForecasting ; Monetary policy